Sunday, 3 January 2021

Gravity (NASDAQ: GRVY) - Ragnarok Online, from PC to Mobile

Gravity (NASDAQ: GRVY) is a South Korean video game developer, mainly known for Ragnarok Online (RO). RO was launched in 2002 and was pay to play, but had their code leaked/hacked leading to the birth of private servers.

https://sec.report/Document/0001564590-20-053707/grvy-6k_20201113.htm
What started primarily as a PC game, majority (~70%) of their revenue now comes from Mobile games. GRVY's increase in revenue in 2018 came primarily from the launch of their Mobile games, nearly tripling and doubling their revenue in 2017 and 2018 respectively.

https://www.sec.gov/Archives/edgar/data/1313310/000156459018009525/grvy-20fa_20171231.htm#ITEM_3A_SELECTED_FINANCIAL_DATA
https://www.sec.gov/Archives/edgar/data/1313310/000156459019013202/grvy-20f_20181231.htm

The stock price has huge run up in 2020 thanks to their impressive growth in their mobile games and improved margins.


Revenue

Ragnarok Online (PC) 

https://irowiki.org/wiki/Servers#Administration

Gravity runs their own servers while also licensing out to various publishers. Most servers are free to play / freemium while allowing players to use real money to purchase items or a VIP subscription to speed up their progression. Gravity also made some questionable decisions such as shutting down the European server instead of coplying with the GDPR. For some reason, RO is extremely popular in Thailand. 

Revenue from this segment has not been growing much, maybe simply due to the game's age or lack of appeal to modern audiences. Gravity made some changes and launch some new "classic" servers as well but the pay to win features still remain. Some turn to private servers for the classic experience or because there's no P2W (though some servers do have P2W in them).


Mobile

Mobile has been a cash cow for Gravity and the primary driver for growth over the past few years.

Some features that keep players playing.

  • Daily/Weekly tasks to keep players logging it "just for the dailies"
  • Auto Battle for those who feel can't keep up because of real life commitments

Pay to Win/Convenience

  • Enchanced Rewards for Daily Tasks (Advanced Kafra Log), ~7 - 24 USD/month
  • Monthly Premium "Subscription" that can also be sold to other players for in-game curency, ~10 USD/month
  • Gacha system for equipment, required for PVP (Player Versus Player) or War of Emperium (WOE / Guild vs Guild)
This is not extensive and there are probably other features they use to monetize the game. Most (mobile) games rely on whales for a substantial amount of their revenue.

On the other hand, loot boxes in video games have been getting increased scrunity from governments over their gambling-like nature.


 
Licensing/Royalty Income
Gravity makes money by licensing out their games out to other publishers, or allowing other games to include items from their IP.
 

http://www.gravity.co.kr/en/ir/pds/view.asp?curSeq=131&curpage=1

Gravity is launching several mobile games in the 1H of 2020, with Ragnarok X and Action RO2 being mobile MMORPGs.Will they be able to repeat their sucess with their previous launches? Or will a new MMORPG simply take away the existing player base from their existing games?

Valuation wise, GRVY trades at a P/S at 3.99. Zynga is probably the closest comparison, being a mobile-only developer/publisher which trades at a P/S of 6.05 and is not profitable.

YoY growth looks a lot less impressive than other video game companies. A lot of it seems to be baked in expectations of the sucess of their mobile games given the bad first quarter of 2020.

http://www.gravity.co.kr/en/ir/pds/view.asp?curSeq=131&curpage=1

Yahoo Finance

https://stockrow.com/GRVY

Rather than looking like a "monster run up" on the chart, it looks more like a regression to the mean. Q3 was definitely impressive but a question is whether it can be sustained. The price run up after Q3 looks like its pricing in another killer quarter. 

The RO IP isn't that popular outside of people who played the original games and the MMORPG genre is less acessible to people unlike Candy Crush or Puzzle & Dragons, so drawing in new p(l)ayers might be harder. The Ragnarok IP is more like World of Warcraft (WoW), popular with those born in the 80s or 90s but doesn't attract much attention otherwise. While I suspect that Q4 will be a good quarter, I question how much more revenue can continue growing and whether the P2W model will continue to be sucessful. Most MMORPGs see declining player base over time, even with updates. 

Is Gravity's solution of launching a new game and catcing whales every few years going to be successful? Or will they alienate their playerbase and split the community between their old and new games?

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