Starbreeze Q2'24: Small steps forward, but still a long way to go

The player activity in PAYDAY 3 (“PD3”) and the overall community sentiment have improved during and after the second quarter, driven by recent Operation Medic Bag (“OMB”) updates and new content releases. However, PD3 activity remains far from the company’s desired level, and it has yet to surpass its predecessor in terms of player engagement. Significant uncertainty persists around whether the upcoming improvements and content releases will be enough to drive a substantial increase in player activity and game sales. As a result, we remain cautious, awaiting clearer signs of a PD3 recovery. We reiterate our Reduce recommendation and maintain our target price of SEK 0.30.

Revenues aligned with expectations, but EBIT fell short due to higher-than-expected direct costs

Starbreeze’s revenues fell 7% y/y to 40 MSEK in Q2, which was in line with our expectations. The y/y decrease in revenue is mainly attributed to significantly lower sales from PAYDAY 2 (“PD2”). Meanwhile, revenues from PD3 (Q2’24: 22 MSEK) were stable compared to Q1’24, beating our estimates of 19 MSEK. The operating profit (EBIT) declined q/q to -71 MSEK, below our estimates of -61 MSEK, due to higher amortization and game development costs than expected. During and after the quarter, Starbreeze continued rolling out OMB updates, while also releasing new content through the second and third DLC, alongside free heists. A first iteration of single-player mode has also been launched, though further updates on features like offline mode, VOIP, and CrimeNet are still pending. While current releases have slightly boosted player activity, it’s evident that Starbreeze still faces challenges in bringing PD3 to a satisfactory level.

We increase our PD3 estimates slightly while lowering expectations from its predecessor

The relatively limited impact of the OMB and the three DLC’s released since PD3’s launch in September 2023 raises concerns about Starbreeze’s ability to fully revitalize the game. However, the company anticipates more noticeable improvements starting in Q3, indicating that it may be premature to dismiss the possibility of a turnaround. In response to the Q2 results, we have slightly increased our PD3 revenue estimates, while lowering our sales expectations for PD2 and third-party publishing. The net effect from these adjustments has not impacted our overall revenue estimates for 2024 and onwards, but rather the revenue mix only. Additionally, we have revised our cost estimates, particularly concerning D&A and game development costs, which have impacted our near-term EBIT estimates. However, the impact on free cash flow is less significant.

The risk/reward remains unattractive at current share price levels

We believe the current share price reflects the market’s expectation that PD3 won’t see a meaningful recovery. While a strong rebound in player activity and sentiment could make the valuation compelling, the fact that most of the PAYDAY community still favors the predecessor, despite nearly a year of improvements, raises doubts about PD3’s turnaround prospect. The reaction from the community to upcoming content and feature releases will be critical in shaping Starbreeze’s future and financial stability. Given this uncertainty, we believe a conservative approach remains warranted. Our DCF-valuation stands at SEK 0.39 and represents a moderately optimistic long-term scenario with cash flows highly concentrated in the future. As a result, we do not think it provides good support in the short term, as Starbreeze's valuation is strongly linked to the short-term performance of PD3. The Dungeons and Dragons game is progressing as planned toward its 2026 release and is now in full production. However, we believe it is still too early to make any adjustments to our estimates linked to this game due to uncertainties around the future partnership structure and the market interest. As a result, it currently offers limited support for the share at this point.