CD Projekt - Reasonable Valuation Or The Largest Bubble In Central Europe?

Warsaw Stock Exchange (WSE) performance over the last several years has not brought anything special to investors. It can be said that it is at a similar level as 10 years ago. This is mainly due to the fact that during this cycle capital has been focused mainly on the U.S. market, bypassing emerging markets including Poland.

Nevertheless, even on the WSE, we can find a sector that arouses investors' emotions. In this case, it is the gaming industry.

Although there are many interesting gaming companies in Poland, one of them definitely stands out in the foreground, as evidenced by having a 50% share in "WIG.GAMES" index. It is all about CD Projekt.

Current and future valuation of the company are still exciting, especially since expectations for the next production (Cyberpunk 2077) became huge. So let's have a look at the current market valuation and how it may change after the new game release.

Indicators better than real ones

Last decade has been a great period for CD Projekt shareholders. Over that time, the company has generated fantastic results, especially over the years 2016-2018 (after The Witcher 3 success) when share prices exploded in a similar manner like those of Amazon or Netflix.

Currently, CD Projekt share prices are worth roughly 210 PLN.

There have been 4 years since the release of the last game. Company is trying to find new projects to generate profit (e.g. CD Projekt store opening), which does not change the fact that it is in a certain stagnation. The Witcher 3 profits have fallen quite significantly, and current valuation increases are already discounting future success of Cyberpunk 2077 (release date is scheduled for April 16, 2020).

Anyway, we need to look at CD Projekt valuation indicators. At this moment Price to Earnings is 196, while Price to Book value equals 20. Both ratios are 10 times higher than the Polish gaming sector median. Such levels suggest huge relative overvaluation of CD Projekt.

We could justify the company for reasons mentioned above (specific period just before next big game release), if it were not one fact that has been pointed out by Dr. Jacek Welc during the last Wall Street Conference in Karpacz. During his lecture, he showed that gaming companies in Europe have more flexible financial reporting rules than U.S. companies.

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