Devolver Digital “has a highly differentiated philosophy and culture that has driven a virtuous cycle of success” says Zeus Capital

Devolver Digital Inc (LON:DEVO) is an award-winning, high-profile video game publisher and developer that consistently publishes highly-rated indie games and is backed by industry pioneers: 1) Devolver was named 2021 Publisher of the Year, Indie Publishing Awards, by Gamesindustry.biz, the leading video games industry website. 2) Devolver has the highest career average Metacritic score (75) amongst a group of major Indie publishers. 3) Devolver’s 11-person core senior management has over 250 years of relevant experience. In 2020, Devolver released Fall Guys, a megahit that generated $150m in sales and $70m of EBITDA in FY20 before the publishing rights were sold to Epic Games in March 2021.

Winning formula: Devolver has a highly differentiated philosophy and culture that has driven a virtuous cycle of success. Over 90% of the company’s games have been profitable and the company has achieved 5.5x ROI to date (3.1x excluding Fall Guys). The company was founded on the principles of treating developers fairly and prioritising their creativity and brand. The company focuses on nurturing innovation and supporting developers with one of the most experienced teams in the industry. They have a market leading track record of highly-rated games that attracts distributors and increases the discoverability, longevity and profitability of their games.  Similarly, Devolver’s track record of success and fair and transparent terms attract increasingly high quality developers. Also, its reputation for hiring industry veterans attracts further top talent in virtuous cycles. The company offers developers access to multi-decade relationships with distributors, market leading social media reach and proven ability to scale.

High growth and diversification: Revenue grew 33% CAGR 2016-2019 and then jumped 262% in 2020, boosted by Fall Guys. Similarly EBITDA grew 36% CAGR 2016-2019 and then jumped 620% in 2020. The company’s revenues are broadly diversified. Its top five titles contributed 42% of sales in 2020 and its back catalogue of around 90 titles contributed to at least 60% of sales in the last three years.

Forecasts: The company has a deep pipeline of over 30 high potential games. We conservatively forecast revenue grows 26% organically in 2021 and 51% in 2022 as the company catches up on its release schedule after Fall Guys. We expect to see revenue per new title rise since Devolver is planning a bigger-budget release and increasing investment in development, distribution and marketing. The company recently made five acquisitions and plans to strategically acquire when there is a fit and earnings accretion, using  IPO proceeds and listed shares.

Valuation: Devolver’s shares offer significant value, in our view. While shares trade at 21x EV/ EBIT 2022, below the UK peer group median (25x), the company’s sales growth (26% CAGR 2021-23 like-for-like) is well above the peer median (18%). In addition to a stronger growth outlook, They also offer more diversified game exposure, a higher rated game portfolio and a pioneering management team.

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