Introduction
For many new investors, the allure of penny stocks presents an exciting gateway into the stock market. But what exactly are penny stocks, and why should they matter to you?
Penny Stocks are kind of like the underdogs of the stock market. Picture this: you’re scrolling through your trading app, and you stumble upon these super cheap stocks, often trading for just a few bucks a share. That’s your classic penny stock. They represent smaller companies, often operating in niche markets, and they come with serious upside and downside potential.
Today, we’re going to take a closer look at one penny stock in particular: Embracer Group AB (ticker: THQQF).
Company Overview
Embracer Group AB, formerly known as THQ Nordic AB, is a Swedish multinational video game holding company. Established in 2011 and headquartered in Karlstad, Sweden, the company has swiftly expanded through acquisitions, consolidating various game development and publishing studios under its umbrella.
The company operates through its many subsidiaries which operate in multiple divisions, including game development, publishing, distribution, and licensing. Their gaming portfolio ranges from your traditional board and PC games to the more advanced VR, Console, and mobile games.
Embracer is recognized for its decentralized business model, granting subsidiary studios significant creative freedom while benefiting from centralized support in areas like publishing, marketing, and distribution. This approach has fueled the company’s rapid growth and solidified its presence in the global gaming market.
Financial Performance
Financial Metrics
Revenue Trend:
Embracer Group’s revenue has shown substantial growth over the past few years, indicating a positive trajectory for the company. From 2020 to 2021, revenue increased by approximately 72%, signaling significant expansion in business operations.
The growth trend continued in 2022, with revenue more than doubling compared to the previous year. In 2023, however, the company experienced exponential growth, with revenue nearly doubling again compared to 2022, reaching $37.6 Billion.
Overall, the revenue trend reflects strong performance and successful execution of the company’s business strategies.
Net Income:
Embracer’s net income has also exhibited robust growth over the same period. While net income remained relatively stable from 2020 to 2021, there was a notable increase in profitability in 2022, with net income reaching $976 Million.
The trend continued in 2023, with net income experiencing significant growth, reaching $4.4 Billion. The consistent growth in net income indicates effective cost management, improved operational efficiency, and increasing profitability for the company.
Earnings Per Share (EPS):
Earnings per share (EPS) has followed a similar pattern of growth over the analyzed period.
EPS declined slightly from 2020 to 2021, due to two consecutive stock splits in 2020 and 2021 respectively (The stock splits are marked by ‘S’ in the stock chart displayed below).
However, EPS rebounded strongly in 2022, more than tripling compared to the previous year, reaching $1.08. The trend continued in 2023, with EPS experiencing a significant surge to $4.17, reflecting the company’s improved profitability and potentially boosted investor confidence.
Overall, the company has demonstrated impressive financial performance, marked by substantial revenue growth, improving profitability, and rising earnings per share. While profitability has varied due to investment in new projects and acquisitions during the early years, the firm is on a path of sustained growth and profitability.
Stock Price Movement
A quick study of Embracer’s stock movement in the past 5 years shows a bearish outlook for the company.
From a peak of $16 per share in January 2021, Embracer’s stock has lost about 90% of its value and fallen to just $1.76 per share at the time of writing (March 2023). Despite their growth in various financial metrics discussed above, the stock has suffered massively over the past couple of years and shows no signs of a potential comeback at the moment.
As displayed by the contradictory trend in the company’s share price and other financial metrics, it’s important to understand that in their initial years’ penny stocks are affected more by investor sentiment than their underlying financial performance. A sad, yet important reality in the landscape of small-cap stocks.
Investors Perspective
From an investor’s perspective, Embracer presents offers investors an opportunity to potentially benefit from the growth in the gaming industry at a lower share price (like Bandai Namco Holdings we discussed last week).
With a diverse portfolio of successful game franchises and a proven track record of acquisitions, the company is well-positioned for future growth. Continued expansion into new markets and platforms, coupled with disciplined financial management, could drive long-term shareholder value.
However, this growth strategy has potential downsides for investors in the short run. A growth strategy starves a firm of its resources which results in two things:
- Little to no money left for Dividend Payouts. In this case, the company has not paid out a single dividend in the past 5 years to its shareholders. No dividends mean your returns as an investor are completely dependent on capital gains.
- Increased Risk. As the firm invests more and more in new projects and acquisitions, the shareholder value depends more and more on how the investment and acquired subsidiaries perform in the future.
Conclusion
Embracer Group presents characteristics of a value stock, with its solid financial performance and potential for a turnaround. While the company’s revenue and profitability are on an upward trajectory, it’s crucial to acknowledge the inherent risks associated with penny stocks.
Despite the company’s positive financial trajectory, the stock price has been declining over the past two years, underscoring the volatility of penny stocks. While there is potential for a turnaround in Embracer’s fortunes, it may take time for this to materialize.
In the words of Warren Buffett, “Risk comes from not knowing what you’re doing.” By exercising diligence and patience, long-term investors who are willing to weather fluctuations and hold through potential challenges may ultimately benefit if the company manages to translate its performance into its share price.
Article By: Hamza Bashir. An avid investor and strategic consultant with expertise in stock analysis. He has been investing, analyzing, and writing articles on the stock, cryptocurrency, real-estate, and commodities market for over 3 years.