Valuation of Embracer Group AB

Abstract

The aim of this paper is to investigate the intrinsic value of Embracer Group AB as per 21-02-2022 and to determine whether or not the share price mirrors the expected future performance of the Group. The restrictions and social distancing requirements enforced to mitigate the spread of the COVID-19 pandemic have caused individuals, and businesses, to adapt their behaviour to find new ways of socialising. As a consequence, the number of video games sold during the period has increased dramatically, which in turn has led to significantly higher share prices for companies operating in the gaming industry. As per 21-02- 2022, the number of people infected by COVID-19 is declining, leading to reduced restrictions (WHO., 2022). This has created uncertainty in the gaming industry, as it is difficult to predict how sales figures will be affected when individuals are no longer enforced to distance themselves socially. With the above discussion in mind, the need for updated valuations in the industry is unquestionably high. The investigation is based on a mixed approach, including quantitative data, statements made from employees with central positions in Embracer, as well as market estimates and forecasts. Additionally, a thorough examination of the internal and external factors that may impact the value of the Group has been carried out. Further, the historical performance of Embracer has been analysed, and specific value drivers have been identified to enable a precise financial forecast. The examination discovered that equally high growth numbers for gaming companies are not to expect when restrictions are being lifted. However, it is likely that Embracer will experience continuous high growth, mainly due to its unique, decentralised and diverse business model in addition to a well-established M&A strategy. An in-depth analysis was carried out in order to compute the weighted average cost of capital of the Group, which was utilised in a discounted cash flow valuation model to assess the share price of the Group. The base case valuation indicated a share price ranging between SEK 93.9-101.3, depending on the estimated M&A activity. This implies a potential upside of 22%-32% compared to the share price as per 21-02-2022, hence indicating that future expectations regarding the performance of the Group is not mirrored in the share price per 21-02-2022. Therefore, a BUY recommendation is established.