Revisiting CD Projekt: Still Seems Overrated Following Its Tarnished Reputation (OTCMKTS:OTGLF)

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In November 2020, I wrote a bearish piece on SA about Polish video game developer, publisher and distributor CD Projekt (OTCPK:OTGLF; OTCPK:OTGLY), in which I argued that the company is too focused on quality to be attractive to investors. The company was about to launch its highly anticipated Cyberpunk 2077 video game and my guess was that focusing on developing one quality game at a time was severely limiting its financial performance.

Well, I was wrong and not in a good way, as what was supposed to be the next-gen’s biggest game was plagued with bugs, glitches, and performance issues. In this context, it is not surprising that the market valuation of CD Projekt has halved since the publication of my article. Yet, I am still bearish on the company. Let’s review.

Cyberpunk 2077 and the future

The game was released on December 10, 2020, and many users playing on PS4 and Xbox One were virtually unable to play due to bugs and performance issues. Things looked better on next-gen PCs and consoles, and the company sold a total of 13.7 million copies of Cyberpunk 2077 in its first month of release. However, the problem is that CD Projekt was widely considered by gamers to be the most reputable company in the business, as it avoided rushed games, microtransactions, paid DLCs and monetization gimmicks that many of its competitors still use today. today. Well, that reputation is now gone and CD Projekt even had to release a excuses to customers.

Over the past year, CD Projekt has released several patches for Cyberpunk 2077 and many bugs and issues have gone away. The company noted in its Q3 2021 earnings call that there was growing positive sentiment around gaming on Steam. My problem with this observation is that the number of these positive reviews is low and this is a consequence of the greatly reduced player base.

Reviews on Cyberpunk 2077

To smoke

Looking at the statistics of Steam graphics, we can see that the average number of players over the past 30 days has fallen below 16,000 from over 330,000 in December 2020. For comparison, The Witcher 3: Wild Hunt, a game released by CD Projekt six years ago, has averaged over 40,000 players over the past 30 days. In my opinion, Cyberpunk 2077 issues are not limited to bugs and glitches and they also include gameplay. The story is very linear and there aren’t many customization options in the game. On top of that the AI ​​is kinda dumb and there just isn’t much you can do. do in the open world. Overall, Cyberpunk 2077 isn’t a bad game but it’s so much less than what was promised and it lacks a lot of features. Looking to the future, a DLC expansion is in development but I think it has to be something really special to bring players back.

As for CD Projekt’s financials, third quarter 2021 revenue and net profit amounted to PLN 144.5 million ($36.2 million) and PLN 16.3 million ($4.1 million). dollars). I consider those numbers to be low considering how quickly sales declined this time around after a major game was released. The drop was much steeper than the other times the company released a major game based on the Witcher franchise. Sure, it was CD Projekt’s best third quarter, but many investors expected the numbers to be much higher after the release of a highly anticipated game like Cyberpunk 2077.

CD Projekt revenue by quarter

CD project

The problem for investors is that CD Projekt is unlikely to release any major new games in the next few years, which means revenue could be on a steady downward trajectory, reminiscent of the period between Q2 2016 and Q4 2019. On the balance sheet, CD Projekt had 740.8 million PLN ($185.3 million) in cash and deposits in September, but most of the value lies in intellectual property. In my opinion, it’s hard to put a number on the value of the Witcher and Cyberpunk 2077 franchises, especially at a time when they aren’t bringing in a lot of revenue. Still, I think the company looks overvalued based on its market valuation of $4.58 billion at the time of writing.

Overall I’m bearish but I think investors are better off avoiding CD Projekt as there are several major risks. First, the purchase of Activision (NASDAQ:ATVI) by Microsoft (NASDAQ:MSFT) for $68.7 billion has sparked speculation that there may be more consolidation in the industry and it is possible that CD Projekt become an acquisition target in the future. Second, the company could focus on NFTs and the metaverse, which could improve sentiment and increase its valuation. Third, free DLC and more content for Cyberpunk 2077 could significantly increase the player base over the next few years.

Takeaway for investors

Cyberpunk 2077 is a good game, but the problem is that it was touted as the best game of the decade by a company whose reputation was almost untarnished. In fact, many people argued in the comments below my first CD Projekt review that its market valuation at the time was so high, exactly because of its reputation for delivering high-quality games.

Now many of Cyberpunk 2077’s bugs and glitches are fixed, but few players seem to be returning and I find it hard to justify a market valuation of over $4.5 billion given that quarterly sales have fallen below $40 million. However, I consider short selling risky as there are several major risks, so it might be best for risk averse investors to avoid CD Projekt. I think perhaps the biggest risk here is that there could be more consolidation to come in the industry and that CD Projekt could become a target in an M&A transaction.

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