From the time I purchased Gravity Co. (GRVY, Financial) to today, it’s up 500%. It’s up 624% year to date.
Sadly, I lost on Gravity Co. Plain and simple.
The final straw came when I couldn’t stand the way business was being executed by management. It was delay after delay after delay.
Oh, Gravity is an online game company based on the MMORPG (massively multiplayer online role-playing game) concept. This is where you can have thousands of people play the game simultaneously.
Recently, I randomly came across it again and didn’t realize it was the same company.
You can’t blame me. The stock chart looks like this as I’m writing. The price is 10x from when I sold.
If you care about the history of how I came to invest in the company, follow the links below.
I had more articles on OSV blog, but some were deleted, as no one is going to read about Gravity from seven years ago. You can’t say I didn’t try!
Here’s the 30-second summary.
Gravity was a net-net ADR stock. Its net-net working capital was below the share price with an upcoming huge release of its No. 1 game. Due to constant delays and server issues spanning several years (!), its value kept dropping. It was a wild ride. Up 50% one year, down 50% the next.
Being Korean, I did have an edge in that I could access people, data and forums about game status, consensus and what management was saying that wasn’t getting published in English.
In the end, closed out the position at a loss. It was a disappointing end to the investment.
Gravity in 2017
First, Gravity is a real company, in case you’re wondering.
It’s not a shell, it’s not a cash box.
2016 was a great year for the company.
In 2016, our revenues increased by 44.1% to Won 51,396 million (US$42,698 thousand) from Won 35,660 million in 2015. In 2015, our revenues decreased by 10.6% to Won 35,660 million from Won 39,889 million in 2014. We recorded a net income attributable to parent company of Won 250 million (US$207 thousand) in 2016 as compared to a net loss attributable to parent company of 16,965 million in 2015 and a net loss attributable to parent company of Won 20,907 million in 2014. Our gross profit margin increased to 41.6% in 2016 from 15.1% in 2015, which had been an increase from 14.3% in 2014. Our operating margin was 6.7% in 2016 due to an operating income of Won 3,423 million (US$2,843 thousand) in 2016 as compared to operating margins of negative 48.3% in 2015 and negative 29.7% in 2014. – 2016 annual report
It looks like 2014/2015 was the low point with a rebound in 2016, but still below 2009 and 2010 levels of 60% margins. Especially for a software company.
Source: Old School Value fundamental analyzer
The latest quarterly report has some mixed results.
Revenue in the quarter was up 51% compared to last year. But operating income was down, EBIT had a tiny 2.8% increase and net income was down 12.7%.
Most of the revenue was driven by relaunches of the game as well launching a new mobile version.
Ragnarok M, an MMORPG mobile game
The Company launched Ragnarok M in Taiwan, Hong Kong and Macau on October 12, 2017. Based on revenues, Ragnarok M ranked as first in both Apple’s App Store and Google Play Store in Taiwan, Hong Kong and Macau, at its peak. The Company plans to launch Ragnarok M in Korea during the first quarter of 2018 and in Thailand during the first half of 2018.
· RO: Idle Poring, a text RPG mobile game
On September 13, 2017, Gravity commenced global service of RO: Idle Poring, except for Korea, Japan and China. Based on revenues, RO: Idle Poring ranked in the top 10 mobile games in 12 countries on Apple’s App Store and in 7 countries on Google Play Store, it its peak. RO: Idle Poringwas initially launched in China on April 28, 2017 by X.D. Network Inc. (“XD”). Such game is expected to be launched in Korea and the launch schedule is to be announced in the future.
Considering how under-the-radar this company is, it’s very interesting to see this sort of correlation between the successful launch of a game, as well as the release of the third-quarter report. Somebody must have been waiting and watching.
At any rate, for the first time since 2008, Gravity has tailwinds.
Is Gravity Really Worth $80?
Compared to when I first analyzed it as a net-net, the price has made Gravity into a different story. It’s no longer the net-net I saw.
NVAC of $4.58, NNWC of $3.71 – source: old school value analyzer spreadsheet
Using some estimates and crude projections, here’s what an earnings valuation using Graham’s model and EBIT model shows.
To get the $2.50 EPS, I looked up the second document and saw that third quarter earnings were $2.12 so far. I just did a straight extrapolation to get to $2.50 as an end-of-year estimate.
Graham Valuation for GRVY – source: Old School Value Graham Valuation Model
And to somewhat match the fair value with the current price, the growth rate comes out to 19-20%.
This means that Gravity must continue to grow earnings at a 20% clip. The company is still small and had a good year, so this seems like an achievable task.
If they’ve gotten over the Gravity I know were its constant server and game launch failures, it won’t be a surprise if it comes back down.
One more time with the EBIT multiples method.
In the screenshot, I’ve done the same extrapolation with revenue. A straight line fit is around $85 million by the end of the fourth quarter.
Adjusted Income Statement for the EBIT valuation – source: old school value EBIT valuation
I’ve chosen 15% operating margin as it’s the level the current stock price is based on.
EV/EBIT multiple of 22x was chosen as the norm by comparing with other game companies.
I’ve classified the off-balance sheet as $39.4 million, but it should really be $34 million. It’s the non-controlling equity portion owned by Gungho Online.
I’m not an analyst who follows Gravity and checks its numbers, but I’m surprised to see the stock price closely matches my short-term projections.
But with essentially 0% margin of safety and no record of success exceeding two years, Gravity is not a company I’ll be betting on anytime soon.
Was I Wrong?
When you see something like this, you can’t but question whether you made a mistake.
I sold four years ago and looking at my decisions then with the information I had on hand, I still stand by my choice.
You can see from the financial statements in the first image that the company wasn’t getting its act together. When I sold, the value of cash exceeded the stock price.
In hindsight, it took them another four to give years to get things sorted out.
The main lesson I do get from this is that even small companies take a while to turn around. I tend to think that two to three years is enough for small companies, but Gravity showed that it’s much longer than that.
Do I regret selling?
No.
Do I wish I would have held?
Of course. Who wouldn’t? But stock prices are not fair values. It’s just a trading value.
Disclosure
No positions.
