IGG: Is This Online Gaming Stock a Buy?

Whether you are stuck at home, locked down, or following social distancing, the impact of Covid-19 has forced everyone to spend more time at home.

This represents a huge opportunity for the gaming sector. According to the Global Games Market Report, gamers will spend US$159.3 billion on gaming in 2020, a figure which will grow to over US$200 billion by 2023.

The three major segments of the gaming industry are mobile, console, and PC games. Of these, mobile gaming is seeing the most explosive growth.

One leading gaming stock has recently seen increasing interest from investors.

IGG Inc (SEHK: 799) is an online mobile game developer and publisher based in Singapore with offices across multiple countries including China, the US, Italy, Spain, and Japan. It has users in over 200 countries.

Starting as a PC game developer it now focuses on mobile gaming. IGG uses a free-to-play model, generating income from microtransactions and ad revenue.

Are things going well for IGG?

IGG has seen vigorous growth from 2015 to 2018 with a compounded average growth rate (CAGR) of 38.7%.

Driven by the tremendous success of “Lords Mobile” a real-time war strategy game, launched in 2016, and to a lesser extent “Castle Clash” and “Clash of Lords” – two strategy games released in 2013.

However, revenue and profit fell 11% and 13%, respectively, during 2019 as “Lords Mobile” saw lower monthly average users (MAUs).

Revenue further declined 12% in the first half of 2020 from a year earlier but surprised with an 88% profit increase.

Covid-19 led gaming demand and promotion by IGG helped a resurgence in MAUs for ”Lords Mobile”  while the company also managed costs effectively.

Has the Covid-19 inspired gaming boom reversed IGG’s fortunes? I am not totally convinced. This seems like squeezing more out of existing products rather than improving competitiveness.

Besides, US$54.3 million of its income comes from fair value gains on investment in XD Inc (SEHK: 2400). While a smart investment, it does not improve IGGs operating business, nor does it generate any cash.

IGG’s challenge?

Game developers need new hit titles. IGG’s last blockbuster “Lord Mobile” is in its fifth year. This one title alone accounts for 84.4% of revenue.

With the only other meaningful title “Castle Clash” contributing 7.7%. All other games and apps combined come to a measly 7.9%.

Gamers don’t play the same game forever as they tend to get bored. And while developers can extend the life of games through additional features, promotions and upgrades, eventually MAUs will decline.

What actions are IGG taking?

Over 10 new titles were released in 2019, with another 10 in the first half of 2020, but none have been instant hits.

IGG has diversified by launching Utility Apps like “KeepClean” and “KeepLock”. Management believes the stickiness of Utility Apps will allow the company to build relationships with users and cross-sell other games.

There has been a change in strategy to work with third-party developer teams to stimulate and compete against IGG internal teams. The hope is that this will lead to more releases and better-quality games.

It seems like management has taken a proactive action to address the challenges, but it may take time to see if it can lead to new hit titles.

What should investors be happy about?

On the fundamentals side, IGG seems healthy with good profits, cash holdings of US$339 million and diversified revenue across Asia, North America, and Europe.  The price-to-earnings (PE) ratio of 8.8x also looks reasonable given the good first-half 2020 performance.

With over 30% of IGG’s shares owned by insiders, investors’ and management’s interests seem to be aligned.

This was clear in the first half, where 71% of net profit was used to pay out dividends and repurchase shares compared to 39% during the same period in 2019.

Foolish takeaway

At first glance, IGG seems attractive, with an attractive valuation, earnings growth, dividend increase, and share buybacks, along with positive industry momentum.

Though IGG currently relies on one legacy title in “Lords Mobile”, which will inevitably wind down, I believe the company could develop new hits.

However, I personally wouldn’t buy the stock hoping for a blockbuster. Sometimes it might be better to wait and buy after a new blockbuster is evident rather than betting on one which may never arrive.