Chit Chat Stocks - Embracer Group (EMBRACB) | Deep Dive

Episode Date: May 13, 2021

Embracer Group is an international video game conglomerate. The company owns and operates various PC and console games for the gaming markets in Europe, United States, and other countries. Embracer is known for going out and acquiring interesting video games in order to roll them up into their current offerings. Listen closely as Ian, Brett, and Ryan dive into the history of Embracer Group and where it could grow from here. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:49) Industry | (7:14) Management & Ownership | (8:55) Valuation | (11:49) Earnings | (13:22) Balance Sheet | (16:06) Our Analysis | (18:18) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Okay, welcome in. This is the Thursday Deep Dive Show. We got Ian Gray joining us today. Ian, you just finished up with school and we're kind of in a transitional period if we're going to

use corporate speak, right, before you have your summer internship. So how have things been uh investing wise it's been volatile it seems like stocks are either up five percent or down five percent you're kind of playing in the growth category every day now yep it's definitely been very volatile um have a tax bill come and do this week too so that's always fun and trying to figure out exactly how to how to fund that but um you know it's fun times in the market as always yeah it is definitely not a boring time right now there's gonna be a lot i feel like there should be a lot of first time i still like oh i gotta pay taxes on those yeah yeah especially on like the dogecoin gains that um but today uh we're not talking about dogecoin thankfully we're talking

about embracer group it's a unique and actually large video game company based in sweden it's a roll-up um ryan will get into it but before we do we should talk about seven investing there are partners and if you use our code at ccm at checkout you can get ten dollars off your first month so can try it out for $7. They love the number seven. So they do seven picks each month with a long-term mindset. We just had one of their lead advisors, Anirban Mahanty, on our Tuesday show. So if you want to listen in and get some free insight of how he looks into businesses, I was checking on some of the recommendations with some of the high growth stocks down at the moment. I mean, there's a lot of, I wouldn't necessarily call them bargains. You can evaluate

that for yourself, but there was a lot of interesting research. If you go back through their other months some opportunities may be at hand so i mean this is as good a time as any to try it out i love their picks last month ryan anything else no i just you know add they're not like uh we use it for idea inspiration like we genuinely uh we it's easy to pitch because we look forward to reading the uh picks that they have yeah some you might like some you might not yeah to each his own but with seven picks each month it's highly likely you'll find one idea that's interesting yep and use code ccm uh but without further ado we're talking embracer group a company that i was actually pretty excited that you picked because kind of a fascinating

business model so they're an international video game conglomerate so they're headquartered in sweden but they essentially go out and buy a bunch of independent franchises or publishing companies and then they just roll them up and consolidate them into one um it's a bit like i put this it's a bit like a tyrian in terms of the business model except instead of like amazon toys or items they're buying game companies um but uh embracer is the parent company and then they have i think it's 100 ownership of most of the basically decentralized subsidiaries um and those different there's publishers there's developers and then there's ip owners there so there's three different distinct categories and they have nuances to each of them but some of the companies

will be like publishers ip owners and the developers yeah it's a little confusing yeah but they really publish the games for consoles pcs and mobile and then there's some that are on the nintendo switch but not as much um an embracer now home to 240 owned franchises uh you might not recognize some of them there's a lot that i'm not familiar with they're kind of there's a lot of nordic games so games for like i think most of their market comes from europe but there's World War Z, Saints Row, Borderlands. Borderlands is probably the biggest one that they just acquired. It's not like the AAA games like Grand Theft Auto, Red Dead or like Call of Duty. It's kind of a step below, a little bit more niche, right? Yeah. And they have, so they've

broken it down into eight operative companies, which is what they call it. I kind of like the word operative, so that's kind of cool. But they, each one has their own CEO. So some of the uh operative companies are for mobile specifically like there's one that's really like casual mobile games and then some are more deep experiences that are designed for console but within that there are 63 internal game development studios and they have more than 7 000 employees for reference activision which is the largest largest video game publishing company worldwide uh tencent in america but whatever pure publishing company i thought uh well tencent studio is bigger but yeah i guess they're more than that but i mean one of them the activision

anyway they have 9500 employees so it's as far as the amount of developers it's pretty similar uh they have 61 of their games game sales come from europe 26 come from the u.s and then 10 from the rest of the world um i guess the main point would be they're an acquisition company they're very acquisitive they raise equity they go out and they buy these little companies and then they roll them up uh into what is their sort of parent company yeah it's kind of an ip strategy almost they're trying to acquire as much video game and entertainment as possible yeah and then i'll get into the history fascinating history honestly lars wing of fours i think i'm saying that right uh he grew up in rural sweden with a single mom and when he was 13 he actually started

a used comics business which i know sounds a little ridiculous but by the age of 15 he had the largest mail order comics business in sweden which he then turned into a used games business and he actually dropped out of high school because this company this used games company was doing like 14 million in u.s sales i think i might have got that the the translations the currency transfers might not be equal yeah they were a burden for this company ian yes i was just gonna say but either way isn't that the dream yeah that's 14 million dollar business in high school drop out not a bad life you guys are uh laughing when i compared him to buffett but buffett started his farm he bought the farm at age 15 you know is this the farm for all our guy

uh we'll see we'll see when he was 22 he sold the company for i think the equivalent of roughly 10 million u.s dollars but he bought but he took shares of the company that bought him um which imploded during the dot-com bubble so he sold it and then it basically uh was void of any money and then eventually it sounds like he bought it back and restarted with a different model and they made their sort of they made sort of made their mark and became the publishing company that they are today with some karaoke games for the wii in 2007 and then in 2011 they began starting to buy up these other studios mostly nordic other nordic studios uh and then they went public in 2016 they change their name in 2019 all right yeah thank you ryan i'll get to the industry landscape and

competition uh i mean they operate in the video game market which is worldwide estimated to be about 160 billion dollars in 2020 estimates are for the industry to grow in either like a double digit rate or a single digit rate for you know indefinitely almost and you know a lot of the times i bring out these numbers and sometimes i'm like well you know maybe are these analysts just being too optimistic but i think in this case unless something materially changes worldwide I think this is something you can be highly confident when people are going to be playing video games and the market is going to grow over time, especially when you look at the younger demographics, how much they play.

Tons of competitors in a large industry, as you might expect, you know, Tencent, Activision, Blizzard, Electronic Arts, Ubisoft, K2 Interactive, Microsoft, Sony, Niantic, you can name a ton. Maybe their biggest competition for acquisitions would be more Tencent, Activision, Electronic regards microsoft epic games they like to acquire studios a ton there's a lot well i think some of their more the ones they're kind of competing with because these are a lot of smaller indie developers there are a lot of swedish companies that are basically consolidation place just like this um and they're i think there's like four there's one of like e7 games so it's they're not the only one sort of uh yeah i guess there's model yeah there's definitely other consolidation

I mean, there's tons. There's so many studios worldwide that it's possible to name them all. But yeah, I think nothing else here. I mean, I guess another thing you can watch, Nintendo, Roblox. There's a ton of companies to keep track of, but it's such a large market. It's really on Embracer Group executing with its acquisition strategy. But next, we want to hit management and ownership with Ian. Yep. So as Ryan mentioned, the CEO is Lars Viggenforsch. I believe that's how you say it. I tried to watch, tried to get the pronunciation down, watched a little video, but who knows? But anyways, he's the co-founder and CEO.

One of the things that, and we're going to continue to talk about it today, but it's the structure of this company where it gives autonomy to these eight operative groups, as Ryan mentioned. It just seems like a good way to approach this and really kind of give creators the ability to create and provide them with resources. um we've we've called it a roll-up a couple of times today but Lars actually doesn't like to think about it as a roll-up at all he says um he really wants to build a group of great leading entrepreneurs and creators sees Embracer as identifying great brands and leaders and providing

the capital and the ecosystem to make them successful so it's not just about acquiring the assets or something like we do with Ethereum it's really about trying to acquire at least as I see it acquiring the human capital with some of these brands and some of the IP that they've already created and kind of jump-starting them to create even more amazing IP. If they've created great IP in the past, they think if they plug them into their system, they can continue to create great games and content. He says he's super long-term. That's a direct quote. Loves what he's doing and says he has already made his money. So he just loves this space. He owns about 25% of the company as well, which is a very healthy stake in this. And we'll get to valuation just after

this, but, um, owns a very healthy stake about 50% of the voting shares. Um, so it does have control of the company as well. So that's something to keep in mind as we mentioned sometimes about these companies, these types of companies that, um, you want to make sure that you really trust the CEO when they do have, um, voting control. Um, one other thing is he writes a letter accompanying the report, which is something that I enjoy seeing. I always like seeing how, how a CEO writes about the company and what they think about it. And they go a little more in depth into their comments. And then finally, they are transitioning to standard IFRS reporting. They aren't currently on IFRS, which is the International Accounting Standards.

They say that it'll take about 18 to 36 months for them to transition and then to be listed on a regulated market, on more of a mainstream market that we're more familiar with. And so that's one big initiative they're taking on right now. And we'll clean up the accounting a little bit and provide a little more clarity for investors. And so this is a great example of, it's great to hear management hearing great things. That's always great. We like to hear them talking in the ways that we want them to talk, but we also can't see that as a guarantee of future success, right? It doesn't just because we love management doesn't necessarily mean the company is going to be a great success, but it's definitely a point in their favor.

Yeah. And then valuation also matters as well, which segues to my next segment. I'll talk valuation quick. Market cap from what I last looked was about $14.2 billion. And I'm using the Kofin share count of about 500 million shares outstanding. And the Swedish price for the stock is kind of trading on the OTC markets out in Sweden. I believe that's what it is. It's like the NASDAQ for lower tier something. I think it's like the OTC markets. But the Swedish price was about $236.60. And I'm using the exchange rate of 0.12 Swedish krona to USD. Very complicated one to calculate this stuff. So I could be off a bit and the exchange rate matters. And then their share count is changing rapidly because when they make acquisitions, they're diluting the shares.

But yeah, just something to watch out for. Tigger is E-M-B-R-A-C-B. Seven letters. I think that's record for us uh interesting ticker that they chose that many and then the price of sales is about 14.9 but uh you don't get into it they got a lot of cash in the balance sheet now so ebitda sales are a little lower and then that was calendar year 2020 uh so again things can change rapidly with a company that's making acquisitions like this and then price to operating cash flow was about 37.7 and then free cash flow was actually negative if you include acquisitions um and then their price to internal ebit which is a it's not a ifrs measure or a gap measure that they're using but it's like their own thing to kind of measure their operating

profits their price to eat it was about 52.6 so premium valuation but they executed pretty strongly um i'll head it over to ryan to cover the earnings yeah very confusing trailing earnings yes and some of it's organic some of it is through these acquisitions that we just you know we've we've been talking about. And so something that I found very interesting is in their 2018 to 2019 fiscal year was 15 months long. Not sure how that happened. But it makes the year over year comps from 2018, 2019 to 2019, 2020 look worse than they are. Even though it did still grow, which is kind of impressive. So I'm just going to use the trailing nine months numbers. So the last nine months, they've had $796 million in sales. That's US up 69% year over year. They had 338

million in last nine months, EBITDA up 112% year over year. So it's about a 42% EBITDA margin. And they have an operational EBITDA margin of around 30%. They had $100 million in free cash flow versus negative free cash flow from a year ago. That's their calculation. But then if you include the investments in intangibles, which is I believe basically their M&A, it was roughly double their free cash flow. So they are spending a lot to acquire these companies because they've gotten the financing they're raising equity um as far as guidance goes they pulled back on their fourth quarter guidance it looks like there were some game delays one big one especially um so next year is kind of going to be the big year and they said that they're expected to be the

strongest year ever with more than 70 premium game developments set to launch um it's worth reminding people that this is a very lumpy business because it's very hit driven so it's a lot of it's like uh like they'll have huge sort of franchises release one big game after the development it's not these free-to-play ones like call of duty's kind of de-cyclified and turned it into different seasons and so it's more recurrent it's not like that with uh embracer group um so for most of the games it's not like guaranteed but yeah yeah and it's a i mean mobile might be a little less cyclical, but it's basically you take a long time to develop and you distribute and you hope that it's a hit. And then the last thing I just add here, the last year, their digital sales

made up 73% of overall sales versus 51% from the prior year. A lot of that is attributable to COVID, I imagine, but that's going to improve the operating margins for the business. Yeah. And then we'll kick it over to Ian, but one thing I'll note is that some of it's going to be organic, inorganic growth because they're making so many acquisitions. So when you see these high revenue growth numbers, just know that if they continue acquiring companies, that nominal revenue growth number or earnings number or whatever will look high, but make sure you look at like revenue growth per share or earnings per share, free cashflow per share. That's very important for this company. But Ian, you want to finish things off in the first half with balance

sheet. Yeah, that was a great point. But turning to balance sheet, on their most recent balance sheet, they had about $833 million in cash that was using that 0.12 conversion rate that Brad was talking about earlier. They also recently raised about $890 million in cash that wasn't reflected on that balance sheet. So we'll want to see when this next one comes out exactly where they land, but it should be somewhere over a billion dollars in cash USD, probably closer to 1.5 billion. They've also got about $1.8 billion in goodwill, which isn't crazy given the acquisitions and especially with the cash that varies now, it's not a crazy amount of goodwill on the balance sheet.

I assume some of that might change with, as they move to this IFRS, I think some of the things that reporting is intangibles and goodwill might not necessarily continue to be reported as intangibles. So they're a little flexible. Yeah, exactly. Appreciate goodwill in a five-year straight line method, which is pretty pointless for a video game because it's hard to assess. I mean, more than 50% of their balance sheet is intangible assets.

So it's pretty hard to assess, I think, the value that you're getting. It's really sort of discretionary. I honestly thought what they were doing, I mean, it's definitely not illegal, but it seems like they're just kind of doing a really hard depreciation for tax purposes right now. And IFRS will definitely change that because we say IFRS, just think of that as like international gap almost. Yep. Yep. So there's that. And then they've got about $240 million in debt, which again, for the amount of cash

they have in the balance sheet, does not seem to be a crazy amount of debt. Also relative to their market cap, it's a fairly low percentage. So not a crazy amount of debt. They should be fine. Net cash position. We don't have a lot of insight onto what that debt is exactly. So that's one small yellow flag. But again, it's a small enough number compared to their cash and to their market cap that

it should not have a meaningful impact on the business. Yeah, I would love to see an audit at 20F. We'll probably get one in the next few years here for Embracer Group. But yeah, that's going to do it for the first half. Let's take an ad break, and then we'll get back and talk more analysis of Embracer Group. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one, so you don't have to worry about malware.

Or when your kid downloads a song from a shady link. and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply okay welcome back next up we're going to do product experience uh anyone playing their games i've heard that borderlands people love them they just acquired that i guess that's fine and no we don't that was really i mean that was really the only game that i had heard of i guess they had like bikini bottom dehydrated which is like a spongebob yeah like a story game that's fun that's some kids fun games yeah uh the other one

the the the the most recent acquisition which you're going to talk about gearbox had a few i think they had three franchises that are somewhat notable here in america but like we talked about earlier a lot of these are nordic games they have sort of a big following in europe but yeah 61 percent european sales right yeah it uh that that'll probably go down with this gearbox acquisition but i guess there were some casual mobile games like there's sudoku apps like they own a game they own one of their operative companies it's just basically a bunch of casual mobile games so you might recognize some of those but no i have not played any of these but i'm not really a big gamer ian any yeah i'm not really a big gamer either i've like he said i

I, uh, recognize borderlands, but besides for that, um, not a whole lot of experience with these. Okay. Let's hit competitive advantages. Then, uh, you know, what do you have this week for the competitive advantage this week? I've got a competitive advantage against the, um, other kind of independent studios. So compared to these independent studios that they're acquiring, um, joining Embracer Group creates cost synergies, um, between marketing distribution, back office work finance accounting and even developing games and having a wide variety of talent within the company i think can provide cost savings that you don't have to like across their eight brands now or their eight operative groups it seems like they should have plenty of

plenty of talent around to develop just about any type of game that they want to develop and so i think there's some cost savings there and also just a competitive advantage of having so many such a wide range of games and expertises around that people can kind of leverage to create hopefully better and better ip that seems to be the vision of the founder and i think that i think it is a true competitive advantage yeah i think that makes sense uh ryan what do you have well something that they weren't so they mentioned the word synergy only four times on their 100 page annual report and in the synergies that they talked about it was really like they into the studios the independent studio or the subsidiaries get growth capital they get distribution marketing

and then they get sort of development support so and just general know-how but i'm not sure how much of like the accounting is offloaded because they're still operating as independent companies so i'm curious how much sort of intermingling there is between these two companies it wasn't really talked about that much on the annual report but the studios have more incentive to sell than i thought so i think a lot of game developers develop games because they love to do it they're not just in it for the money and i think you see that especially with some of these indie studios um and so i have a quote here from and basically they don't mind selling because they can kind of cash out and then they can get the resources to kind of grow and get more exposure

to their games so i guess that's a bit of an advantage um but then i have a quote here from the gearbox ceo he says lars's vision of embracer as an allied partner group committed to fueling and accelerating the ambitions of a series of decentralized, successful, entrepreneurial member companies while magnifying the collective value and advantages of diversification across the entire group is the most brilliant strategy in design for short, medium, and long-term success in this industry that I have worked in during 30 years. That's good. Yeah.

I mean, he seems to like them. A lot of buzzwords, but that's good. Yeah. That's good. I mean, that's a really strong praise for Lars. Yeah. I think people don't mind, uh, selling and sort of becoming a part of the bigger thing, especially when they can kind of leverage almost like this older brother to tap into

where it's like, Oh, you know, this is the best way to market it, best way to distribute it. And kind of like, uh, maybe I guess some, uh, when there's a mobile partner where if you're an operative company and you want to translate to some mobile app and you can kind of get the know-how from that other company, I think that helps as well. Yeah. And did you have anything or no on that? No.

And I was going to say, I think we're going to mention highlights and lowlights, but the long-term incentives for payouts they have, I think they do six years. That is strong. It's just aligning everyone's goals with Embrace Group. But I'll hit mine. I mean, this one's simple. You know, within the gaming and entertainment industry, a lot of the time it comes down to the IP you acquire. The reason Disney, I mean, I don't know how much you can calculate what Marvel, Star Wars, and Pixar are worth to Disney, but it's a lot. And they acquired all that IP.

um embracer is kind of working to create a diversified library of gaming properties it sounds simple but it's a black and white competitive advantage i mean no one can you know you they have it and no one else can use it unless they license it from them um pretty simple uh but yeah let's hit future growth opportunities next and where you have i have the acquisition of easy brain so this is another one of the acquisitions that they've made recently they say they have um sort of educational games but they're really currently they're like things like sudoku um or sudoku if i can say it right um and i think i actually played i think sudoku.com maybe is one of their um one of the things that they own i think i played that um a

few times a couple years back or something but it's mostly like sudoku and puzzles and things of that nature but i think there's an opportunity if they truly get into more educational games We've seen a big rise in things like Duolingo and Lumosity, which kind of are right on that balance between like gamifying education, even something like Kahoot. And I don't think they're getting into something like Kahoot. But I think that idea of finding educational opportunities and providing this gaming aspect of it could be something that's interesting. And I'd be curious if they're planning to do some of that with the EasyBrain acquisition. It doesn't seem like it's a huge leap in my mind. Yeah, that makes sense.

Ryan, what do you have? uh i have invested in their existing studios um and so i think the best i mean the best game companies leverage their existing ip i think we've seen that with activision i mean activision they have six billion dollars in cash there's a reason that they don't just go out and constantly buy them if they can translate existing ip to different systems um and sort of revive those that's the best thing for it because the consolidation like the gaming consolidation market in Sweden, super competitive. So you got to, at some point, start to really leverage that existing IP. And they said they're investing, or they invested $63 million in ongoing development

just this quarter. I like to see that. I want to see them keep that up. And then they've got this strong pipeline coming in. I mean, it's kind of this catch-22 because it's like, if they can add, if the cost of capital is this low and they can add these prominent brands that are willing to sell why not do it but at the same time you want them kind of uh making most of the money off their existing ip because it doesn't cost as much i don't know i guess there's kind of the balance between the two but that's definitely they mentioned that as a strategic pillar for themselves yeah as long as they can acquire things at a reasonable price i don't think anyone should be concerned but yeah leveraging that existing stuff the key with them i think their advantage

that they try to tout is since if you're not an indie studio anymore you don't have to worry about oh shoot we got three years of burn left we gotta get this thing out you can really have a long-term strategy of all right we're gonna do this with mobile and we got a free game maybe we're gonna launch some esports thing or whatever uh but they give them a long-term time horizon to invest um i guess yeah i'll hit mine then i took the big one active acquisition of gearbox uh it was announced post the latest earnings so it's not included in the ones that ryan mentioned but it's founded in 1999 bringing on over 500 employees to embrace your group so pretty large acquisition um it was a 600 363 million uh enterprise value sorry that's in us dollars

363 million dollar enterprise value with payout incentives that can i think go above a billion dollars over the next 60 years if they execute and generate like 1.5 billion dollars in operating profit. They're the ones that own Borderlands, Counterstrike, according to the investor presentation. They've worked on Halo before and some other stuff here. Borderlands is the big one, though. It's had over a billion dollars in net bookings. And apparently, Lionsgate is investing in a Borderlands movie as well. That's interesting. I guess that's just another way to make money. But it seems like an acquisition, like $363 million. And yeah, there's incentives if they do well but 363 million dollars seems really reasonable especially with their stock

price i don't know what you guys think yeah uh it looked like a good one and it might just be because it's the only name that i'm familiar with their entire portfolio but uh it yeah borderlands i've heard is is very popular at least here in america yeah all right highlight some low lights ian uh what do you have for embracing i think this is going to be a common theme among us but I had management and the structure of the company that was just really impressed and just liked hearing management talk. I'd also say one other one was the organic revenue growth. So despite the fact that they're making all these acquisitions in the last quarter, they still were able to put up 21% organic growth on top of the growth from acquisitions. So

that seems like a pretty good number to me. If they can continue to do that and do a 20% Kager for, for a few years on top of all these acquisitions of organic revenue growth, um, that would be, I think that's a big deal for this company. And I think it would be, uh, you know, it kind of proves that these acquisitions they're making are actually good acquisitions as far as low lights go. Um, pretty simple here, just the no, no audit and I'm not on a public market. So I think once we, you know, they're, they're say the highlight is they're making the transition to IFRS and getting more standard accounting structure and things like that. So that'll be good. But right now, there's just a couple of questions on my mind about what some of the

numbers are and what it is exactly. But maybe that's just... Sometimes maybe it's... This is probably going to be controversial. Sometimes maybe it's better not to have all the accounting information at times because we'll get too lost in the weeds. And we're actually... We just see the story here and kind of get the general picture of the financials. So anyways, but that is a low light for me yeah something i want to know i want to there's a few things i want to know about that it fully audited under the actual standards but ryan what do you have yeah that was something that didn't make sense to me they said they are required to conduct an internal audit which usually is a red flag to me but then they had some ernst and young cpa come in and audit on

the annual report so i wasn't totally clear what was going on there it seems like they're just kind to do in their own nitrous though yeah i mean there was no they're not it doesn't seem like they are required to report any specific way and that was pretty clear with the random i mean there's no gap in income yeah or if i if rsb yeah yeah uh but when there's something like that you kind of have to just gut check to see if management is being honest uh and and see what you think of them and i did like lars uh i thought uh he cares a lot about the business he owns 30 of the company or whatever it is um and they are looking to be list on a major index here although uh i don't know the 15 15 month fiscal year threw me off i was like it seems like you don't have your ducks

in a row in the back end but um generally i do like the business model i i uh i think sweden is sort of like it feels like it's becoming kind of this tech hub uh maybe it already is one it i'm seeing a lot of companies that i kind of like out of uh europe over there um only low light would be i'm kind of not i had the same thing with a tyrian where i'm not a huge fan of just acquisition after acquisition because it's hard to track as a shareholder and know what kind of value you're getting and the dilution's a little hard to calculate so i mean you can play a lot of games make everything look good yeah and i think especially in markets that we've had recently like people are willing to overlook the equity dilution um but it matters right like your your

portion of the company is obviously shrinking if they're just issuing more shares so um i guess it takes more time to see how those acquisitions play out and whether they're actually a creative valuable yeah and then i would mention on the 2018 that year where they kind of had the tough stuff that ryan was mentioning their revenue grew like a thousand percent that year so i think we can kind of maybe a tiny bit of slack if they grew probably a lot faster than they thought and they may have been overwhelmed seems like everything's good now but i mean if you're growing revenue at a thousand percent i mean maybe they acquired too much your bats or something like that but or it went too well like some some game might have just done phenomenally

i couldn't really find out anything on that but yeah it might have been like a merger or something probably should look at that but yeah the whatever it was i think the studio really jumped up that year but they've jumped up every year so i don't know they did they probably just had a kick in you know in one of their studios but i'll hit my highlights i love the payout incentive model they have over the six years based on financial targets so basically how much cash that studio generates over six years if they had different targets uh the ceo and the employees get payouts um business model to me seems highly scalable especially if you consider it more of like an entertainment conglomerate um you know this thing i don't know they said they're one percent penetrated within

the video game industry yeah there's already a lot of large companies that will be tough and then it's competitive but it's a growing market um we'll see how many more acquisitions they can make um and i do love lars and the management structure that decentralization stuff we talked about a lot of it is you know reading about how he dropped out of high school and then kind of just ended up around 30 years later being a billionaire running this thing it seems like it kind of just fell into his lap obviously he did well you know he had to execute on a strategy but he kind of just went from reading it it seems like he just went with the flow and was like you know what let's just start acquiring stuff and all right i guess we're a 15 billion dollar company generating

a lot of cash all right guys if you see the pictures of him in high school it's kind of funny that the guy that started that company is where he is 13 yeah yeah it's it's funny that's almost the same it's different like corporate structures but it's it's all through that one thread it could make for a really good story someday um low lights though same as you guys no audit um and they just raised almost a billion dollars in march it makes me feel like that maybe they're trying to use their inflated stock price right now is that a premium valuation but they raised a billion dollars in march i don't know maybe they're going too quickly seems like they're acquiring a lot of companies really fast. Yeah. It tends to give me some pause, but, uh, I guess move on more or less

interested in. I'm definitely more interested, but I think between the valuation being like the valuation, isn't a screaming buy to me right now. It's, um, it's not like a, it's not crazy high either, but it's not something that I'm looking at and going, Oh, I have to get in this right away. Um, and then I think though, like just as we've talked about, I like the business, I like the model i like lars um and it's something i'm definitely going to keep an eye on because something i i think i was thinking about this as we were talking and i think one of the things that is so interesting in the film space right now and movie and streaming space is just the reliance on ip and as everybody tries to come out with these new services it's all about the ip

and the ones that have good shows and content do well and the ones that don't don't and that was something that Netflix really identified early on. And it seems, I don't want to compare Embracer to Netflix, but it seems like Embracer is kind of seeing into the future a little bit and going, okay, we need to acquire as much IP as we can right now, because eventually there's going to be better ways to monetize this. And it's going to become more and more valuable as we move forward. And so that forward-looking vision, I think is interesting. And I think that there is a chance for them to acquire a lot of these independent studios that have some great IP that they'll be able to monetize better so i'm i'm more interested but um but a couple little concerns yeah ryan

i'm more interested i guess um the valuation i i don't think it's that attractive i mean if you just looked at the quarterly numbers and you're like yeah revenue's up whatever 50 100 look at the operating dashboard it doesn't that's not a perfect that's not super indicative of the actual underlying growth the business because there's timing issues related to it uh when i first looked at this i thought like great this is like the match group of these small games but there are competitors that are doing that are sort of not using this exact model um and if you think the valuation is perfect and you're saying what the hell are you talking about i don't think they would have raised a billion dollars um if they thought their shares were undervalued right so

yeah uh but they are sort of using that to their advantage i don't know i like laura's um yeah he seems like an outsider i don't know if you've heard that book but it seems like what an outsider you know i don't think it's his company too yeah like it's his company and you can they do like two and a half hour earnings presentations um but you can just listen to him talk like he understands the business they have a cfo but it's really laura's running the company uh or at least the parent company i don't know i guess i'm on the fence what about you uh yeah i guess i'll just give one note here for clarification i wrote this down in my notes um so they had at 27 at the end of 2017 they had 238 million shares outstanding and then right now they have about 500 million

from coifin's estimate um and net sales in 2017 were 61 million net sales in 2020 954 million don't have the exact growth rates there but they have grown organically but again you have to watch out what that revenue growth is for sure um for more or less interested i'm more interested uh but like ian valuation and ryan said this to valuation and let's wait for an audit um yeah i mean a 14-hour sales i mean the stock is done phenomenally it's up like 2 000 in the last three years i'm just seeing overvalued right now phenomenal company i love lars but yeah i might be Yeah, and we might be undervaluing some of the IP in some of their Nordic games. Like they might be super well-known over there.

I guess they're just not huge here. But the thing is they're well-diversified. They have like over 200, I think, brands right now. I don't have the exact number, but with that many, it's more of a diversified strategy. I don't know. I'm more interested, but it's just valuation. Let's get an audit going. Yeah, it's a no for now, and I'm comfortable saying that.

like i don't think there's any problem in waiting on this like they're obviously taking this to a major index and they're going to get that ifrs reporting i'd rather wait for that yeah for sure um we could miss out but and for if you were holding a brace group you've done it wrong way i mean there's no reason to sell now uh yeah but yeah you know anything else before we wrap up nope all right that's gonna do it for this episode i oh oh you you got next week ryan what do you have good rx oh okay okay that's fun that's fun yeah i've heard a lot of good things a lot of people uh confirmation bias there's some big investors in it that uh i admire so it helps yeah it could be that is an interesting big richard chu company yeah they uh they're a

disruptor um lots of i guess yeah i'll be finding one to investigate um all right that's gonna do it for this episode thank you all for listening i will remind you again if you want to check out Got7investing, use our code CCM to get $10 off your first month. As another reminder, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Clients in Arch Capital may hold securities discussed in this podcast. Thank you all again for listening.

We'll see you next week. you