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CD Projekt Red: A Turnaround in Financial Results Doesn’t Negate Weak Execution

And now for something completely different: We delve into the realm of video games and take a look at the pride of Polish gaming, a world renowned company named CD Projekt Red (CDR.WA, trading in Warsaw). Founded in 1994, the Warsaw based studio is best known to have created The Witcher series, based on the fantasy works by novelist Andrzej Sapkowski. With three iterations of the video game (on the PC, Playstation and Xbox platforms) dating back to 2007, the series has to date sold an incredible 65M+ copies. The latest installment, (Witcher 3: Wild Hunt) has won numerous Game of the Year awards while still having an extremely large following, despite a 2015 release date (and subsequent expansions in 2016). The game’s popularity even spurred its own critically acclaimed live action series on Netflix with two seasons so far, following a 2019 debut. Unfortunately, the hits have been slower to come by since then.

Following years of hype, the studio’s latest video game offering was the release of Cyberpunk 2077, a first-person action RPG built on the internally developed RED4 engine. Though the game itself was well received (today at least), the January 1, 2021 launch was torpedoed by network crashes (due to the influx of day 1 download requests – 8.0M digital pre-orders), numerous in-game bugs and performance issues. This led many gamers to post terrible game reviews (justifiably) and many other to demand a refund. Though the latest patches have pretty much worked out all the kinks (after months of work and incremental fixes), the studio which seemed to have the golden touch ever since the release of The Witcher, suffered a massive blow to its reputation given all the negativity and press due to the botched game launch. With it, the stock price plummeted from a high of PLN 450, just one quarter before the release of Cyberpunk 2077, to a gradual low of PLN 150, just one quarter after the release. Fast forward to today and the stock price is at a three year low at PLN 127 and has by far underperformed the VanEck Video Gaming and eSports ETF (ESPO).

Though the company has since recovered from the launch debacle (thus far 18M+ Cyberpunk copies have been sold to date), the reputational damage has been felt. The good news is that the company reported better than expected Q4/2021 financial figures with revenues of PLN 273M (+89% sequentially), EBITDA of PLN 117M (+172% sequentially) and net profits of PLN 88M (only PLN 16M in Q3/2021). Though there were some one-off items, the adjusted figures also topped expectations. Despite the turnaround with the financials, its still a longer term story as the all-important product pipeline is still on shaky ground. This comes as the much anticipated Cyberpunk expansion has been pushed back to 2023 while the next generation console version of the Witcher 3 has also been somewhat delayed. Not much is known yet about the eagerly anticipated fourth installment of The Witcher video game, but management did note that it currently is being developed and the company has ditched the Red Engine in favour of the Unreal Engine 5 instead. Like Rockstar Games (of Grandtheft Auto fame), CD Projekt Red’s philosophy was to devote all resource to one project at a time. This strategy was abandoned last March as increasing number of agile development teams will continue to work on both Cyberpunk and The Witcher 4.

Though a much smaller $Mcap than publicly listed peers (above), note that the valuation metrics are somewhat skewed for CD Projekt Red owing to its status as the least diversified company in its peer group. With much of the company fortunes riding on The Witcher franchise, the studio will be trying to resurrect the brand by going back to the well and betting everything on the upcoming game release (the PC/console game is still years away, however an upcoming Android/iOS offering is expected to be launched within a year). We know the interest and hype will be there, but at this point its all about adhering to pre-set timetables and execution.

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