Video gaming has surged in popularity during the pandemic. According to Mordor Intelligence, the market was worth $174bn (£130bn) in 2021 and is likely grow 9.6 per cent a year, on average to 2027. Microsoft’s recent $69bn bid for Activision was a sign that big tech sees gaming as important for their growth strategies. Netflix has also announced plans to launch mobile games based on its valuable intellectual property.
The excitement around the industry means that most game development studios are priced for explosive, multi-year growth, and trade on forward earnings multiples in the mid to high 20s. However, Embracer Games (EMBRAC:SE), the highly acquisitive Swedish gaming business, is trading at a very undemanding price of just 10.5 times broker Berenberg’s 2023 earnings forecasts. Given the group’s track record and prospects, that valuation looks unduly pessimistic.
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