I wrote a small analysis of Coffee Stain Group in the bought/sold thread, and since the company doesn’t have its own company thread yet, at @Spwni’s request, I’m opening a dedicated thread for discussion and copying my analysis here:
Coffee Stain is a Swedish company spun off from Embracer Group, founded in 2010. The company develops and publishes games. As I understand it, the games are mostly “Indie” type, meaning lower budget and scale A or AA games (for example, Remedy makes larger budget and scale AAA games). The firm’s best-known IPs are below:
Coffee Stain consists of 13 smaller, independent studios that Coffee Stain Group either owns fully or partially. In addition, the company includes 2 publishing studios:
The firm has a moderate headcount relative to the whole, with about 250 employees divided among 13 studios. Coffee Stain’s goal is for “small teams to make big games for a massive audience.” The studios are located in Scandinavia, and the company operates on a “decentralized” model with small teams of 5-30 people. This structure is intended to unlock a capital-efficient ecosystem where autonomous studios are fully responsible for game development and updates, while the small main organization provides both strategic and publishing support. The company considers its employees to be its most important asset.
Coffee Stain develops and publishes games on PC, consoles, and mobile devices, combining internal development with selective partnerships on promising projects. The firm’s philosophy is to prioritize gameplay quality and long-term cooperation with the player community. In practice, this means early access (early feedback from players), enabling user-generated content (“mods”), and continuous updating. This is meant to enable sustainable IPs with a committed player base.
In addition to its own game development, the company seeks strategic partnerships, attempting to identify high-potential external projects at an early stage and trying to grow/nurture long-term business relationships with them.
According to my own research, the biggest upcoming releases are Valheim 1.0, the PS5 release, and Deep Rock Galactic Rogue Core, but I haven’t found any more detailed information about upcoming releases or the pipeline.
The firm’s flagship IPs have also received very good reviews, and while I haven’t played all the games myself, practically everyone in my social circle who has played them has praised at least Satisfactory, Valheim, and Deep Rock Galactic. I think this is a good sign. I believe there’s also plenty of “junk” within those studios and portfolios, but I didn’t start investigating so deeply that I would have gone through the past production of every studio. In the big picture, I think it’s actually a good thing that they experiment with all sorts of things with a low cost structure; this naturally results in a lot of unproductive junk, but in the case of big successes, the low cost structure allows the business to scale very efficiently.
Historically, the company has been able to grow very profitably, although they have been treading water for the last couple of years:
The company’s fiscal year runs from April to March, which explains that annual breakdown. In this case, Cash EBIT means adjusted operating profit without depreciation and amortization, minus gross investments and the payment of lease liabilities. I’m not very skilled with accounting, but my own conclusion is as follows: in practice, this is EBIT minus investments, and according to my digging, it has been a smaller figure than adjusted EBIT, and generally, this is well in line with the company’s reported free cash flow.
As seen above, even though the company can generate revenue and carve out substantial cash flow from old IPs (according to my calculations, EBIT% has historically been around 30-50% of revenue), revenue and earnings are typically very volatile for a gaming company, and peaks occur near successful releases.
The firm’s market capitalization is currently 4.85 billion SEK. The firm has no debt and has 269m SEK in cash, so the EV is 4581m SEK. LTM free cash flow excluding working capital is 384m SEK.
Using simple math, I get an EV/FCF figure of 12.6 or a cash flow yield of ~7.9%. If working capital is taken into account, this looks even better, but I’ll conservatively use that 8% cash flow yield. With this valuation, I don’t think much growth at all is baked into the share price; I assume the market is pricing this now as if the revenue/cash flow generated by the company won’t grow much, but rather will stay at the current level—the level that can be milked from the current portfolio and DLCs. Thus, I see that no future hit games are priced into the stock, which would grow revenue and cash flow.
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An interesting, highly profitable growth company with a good track record from the past.
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Focus and strong expertise in its own niche, which is always a plus.
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From a player’s perspective, a good combination of a strategy focusing on games with good gameplay, while operating with low-cost small teams on low-cost A and AA-level games, which nonetheless have high revenue potential upon success; due to low costs, the business should scale well.
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Since the creators are key in these types of games, it’s good to see that the company at least verbally regards employees as its greatest asset.
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The current valuation is, in my opinion, very low, and I believe no growth is priced in.
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If the company could achieve a similar performance as in the 22/23 fiscal year (which was a very strong year due to Valheim and Deep Rock Galactic Game Pass deals and the Goat Simulator 3 release), the firm would be priced at an EV/EBIT of ~4.6 with that 999m SEK EBIT.
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In a favorable situation, I see both the company’s cash flow growing significantly from the current level and a significant rise in valuation multiples.
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As a risk, I see the possibility of the company becoming a “value trap,” i.e., failing to release successful games in the future, causing revenue and cash flow to fade over time, and the share price along with them. Of course, with the current strong cash flow yield, I don’t see valuation multiples dropping significantly, so I don’t think much money can be lost here in the long run.
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In line with the above, I see an excellent risk-reward ratio here; if good development continues, the business level could at least double from the current on a 5-10 year axis, and there’s room for growth in valuation multiples, but I believe the “downside” is limited.* Aki Pyysing has also written a column about the company that is definitely worth reading: https://www.sijoitustieto.fi/sijoitusartikkelit/coffee-stain-digisauruksen-hyppy-tuntemattomaan I haven’t read any other analyses of the stock, but as a note on this, the insiders have apparently been on a buying spree. According to the article, the main owner has bought shares for 11.3m SEK, the CEO for 8m SEK, and the CFO for 2m SEK. I tried to find confirmation for this myself but couldn’t find information anywhere, but in any case, if management buys heavily, I think it’s a positive signal; they wouldn’t buy otherwise if they didn’t see value in the business.
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I believe the market is currently underpricing the company because no one knows about it. This is a firm valued at about 450 million euros, which was spun off in December from Embracer Group—a company despised by investors—so I assume that’s why no one is interested in the firm yet.
What thoughts does the company evoke in fellow investors? Have you researched it and reached the same conclusion as me? Have you researched it but decided not to invest, and if so, why? Have you seen analysis of the stock anywhere else?
Discussion about Coffee Stain Group starts at 31:49.
