TINYBUILD TBLD
October 27, 2023 - 10:38am EST by
FuzzyLogic
2023 2024
Price: 0.08 EPS 0 0
Shares Out. (in M): 204 P/E 0 0
Market Cap (in $M): 20 P/FCF 0 0
Net Debt (in $M): -14 EBIT 0 0
TEV (in $M): 6 TEV/EBIT 0 0

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Description

tinyBuild is a publisher and developer of indie and AA video games played on PCs, consoles (Xbox, Playstation, Switch) and to a lesser extent, mobile devices. It was founded by the CEO Alex Nichiporchik (“Alex”) in 2013 who currently owns 37% of the equity, and listed on the UK’s AIM exchange in 2021 when the market for tech-related companies was extremely buoyant during COVID. Since its listing at $3.02 (share prices & market caps expressed in USD despite UK listing in GBP and Frankfurt listing in Euros) per share at a market-cap of about $600m, the share price has plummeted by more than 95% to its current price of $0.10 and a market cap of $20m, creating the opportunity I see today. Due to this small size its probably only relevant as a PA position. At today’s prices I estimate the stock trades at between 1.0x and 1.5x EV / EBITDA on anticipated year-end earnings to December 2023, or about 0.25x book value.

My investment thesis for tinyBuild can be summarized in four points: 1) an incredibly cheap valuation of the current portfolio, 2) an aligned founder that understands video games development, people and has a long-term approach, 3) significant ignored latent value sitting in the game pipeline, and 4) further (free) optionality pertaining to unearthing a big-hit game. The price mitigates even some of the most severe downside scenarios and I expect anywhere from 2.5x under a simple re-rating to a 10-bagger under decent execution.

The reasons for listing in 2021 were two-fold. The first was to raise capital for further investments into new and existing video game franchises. The second was to use the stock to incentivise staff and align the interests of the current and prospective employees with the financial success of the company. Since listing, the company has launched several successful games (and had a few misses) and spent considerable capital on developing a broad pipeline of new game titles. A video game typically takes between 2 and 5 years from the start of development to launch, so much of the IPO capital still hasn’t translated into earnings for the company (ie. latent pipeline value).

tinyBuild consists of 12 internal development studios around the world that are each responsible for certain game titles under development. They have a portfolio of more than 80 existing indie and AA game titles with a further 50 projects under development (some of which are new games and some are add-ons to existing games). Their top 3 titles make up 38.5% of their revenue and top 10 make up 67% making them quite diversified and not overly reliant on a single game for their current earnings. The company’s goal is to focus on IP ownership and create long-term scalable franchises across multiple media formats. Once they have success in one game they like to leverage that success into additional spin-off game titles as well as linear media (books, comics, animated series). This lowers their risk since selling a follow-on version of a hit game is far easier than marketing a brand new title - the hit game already has a large fan following. When developing a new game title, tinyBuild looks to build 1,000 hour games (those that players will spend at least 1,000 hours playing) because those tend to be the ones that have real franchise potential. 

Video games can broadly be split into three types:

  • indie (short for independent) games which are often self-published and have small development budgets of less than $1m and typically sell for less than $20 per copy; 

  • AA games have slightly larger development teams and are often funded by 3rd party publishers. They put up the typical $500k - $5m needed to develop and market the game and typically sell for $10 - $30 each (premium AA games could cost as much as $10m to $20m but this is not where tinyBuild’s focus is); and

  • AAA games that have large development and marketing budgets sometimes exceeding $100m, paid for by large game development companies, and typically sell for $40 - $70 each. 

tinyBuild makes 65% - 80% of their revenue from their own intellectual property (“own IP”) where they own the full rights to their indie or AA games, and the balance from the 3rd party publishing of someone else’s game for which they take a share of the revenue. The company makes profit by selling a game for more than it cost to develop and market, with tinyBuild aiming for a minimum 2x return on their investment in each game title. 

There are several reasons for the dramatic fall in the company’s share price: 

  • The market for small tech companies investing large amounts of capital in exciting (or hyped) but uncertain future outcomes all-but dried up in 2022. There are countless examples of such companies, in the US and globally, where the change in sentiment has decimated their share prices. 

  • The video game industry has come under pressure more recently, with reduced game sales and layoffs by the largest firms like Microsoft (which own Xbox) – this has affected tinyBuild’s near-term revenue.

  • The existing portfolio of games being developed has consumed a large portion of the company’s IPO proceeds and subsequent operating cash flow without yet materially contributing to the company’s earnings. This latent value build-up is being completely ignored by the market currently.

  • tinyBuild has made some mistakes, the main one being the acquisition of a 3rd  party publisher called Versus Evil which has been substantially written down. 

  • Lastly, the stock is now extremely small at a $20m market cap, which takes the company off the radar of most investors. This has resulted in low liquidity and large spreads, with a few large sellers having a disproportionate impact on the company’s share price more recently.

So with all this “hair” on it, why do I like tinyBuild as an investment? Let me list the reasons: 

  1. Unlike many of the speculative investments that were decimated in 2022, tinyBuild is profitable, makes positive operating cash flow, and is debt-free. It plans to remain debt-free and expects to break free cash flow even (operating cash flow paying for game development) in 2024.

  2. The company is run by its founder who has shown his leadership qualities during some tough times and has deep expertise in video game development. He started playing games professionally (to feed his family) at the age of 14 and has built a large game portfolio from scratch. He owns 37% of the equity and wants to buy more of it (if the other shareholders would let him – more on this later). And equity that was worth more than $200m at IPO is now down to below $10m.

  3. The company thinks long-term. It thinks about media franchises. It is not chasing near-term earnings but is focussing on creating IP that will last decades.

  4. The company is cheap. Dirt cheap. Even if one ignores the $60m spent on the games under development since the IPO that are mostly being launched in the next two years, the existing portfolio of games should return at least $8m EBITDA in FY23 which translates to a multiple of just 1.3x EV / EBITDA (allowing for the $10m guided cash on hand at year-end). Comparable companies currently trade (after the recent industry downturn) at 5x this multiple. And this valuation for tinyBuild is almost certainly “trough earnings”, having made $20m EBITDA in FY22 before the recent industry downturn and multiple new game releases expected in the next 24 months.

  5. The company has a track-record of successfully developing, marketing and selling games that attract hundreds of thousands or even millions of players. Marketing is a core strength of the company, having built a network and strong brand beyond the games themselves. Several of tinyBuild’s future games in the pipeline rank very highly on independent sites, which bodes well for future sales. These games cost a lot of money to develop and are yet to affect earnings.

  6. There is always the opportunity that tinyBuild creates a mega-hit, a game that costs $1m - $5m to make and returns more than 50x its initial investment. This is hard to predict or rely on, but there are many examples of indie and AA games that struck a chord with gamers and transformed their development companies. This optionality exists within tinyBuild as they constantly explore innovative game concepts and spread their net widely. And importantly, the current market cap places no value on this optionality.

In summary, the company is priced as if its going bankrupt. With no debt, an existing catalog of games that are profitable and the ability to turn off new game development spending at any time, bankruptcy seems like a remote possibility. If the company just achieves below-average results for its upcoming games, it should comfortably return to $20m EBITDA which at a low multiple of 5x will yield a 4x return over the next three years. But based on my research, there seems to be a fairly high likelihood that this company succeeds in which case an investment in tinyBuild at today’s prices could be a 10-bagger or more in a reasonably short period of time. This is certainly an asymmetric opportunity with substantial (albeit uncertain) upside and the downside massively mitigated by the valuation.

  

A brief history of tinyBuild – from a Kickstarter-funded game to IPO to a share price crash 

tinyBuild started in 2013 when they released No Time to Explain, an indie game that achieved overnight commercial success. The game was conceptualized by Tom Brien who built a tongue-in-cheek flash game over a weekend in 2011. Alex saw potential in the game and they partnered up, raised money through Kickstarter for the game’s development, and launched the title while working in other jobs. Part of the game’s success was driven by influencer-marketing (before this was really a thing) which also gave birth to tinyBuild’s current marketing strength as a 3rd party publisher. 

After the game’s success they quit their jobs and rolled the game’s proceeds into a second title called SpeedRunners, which they co-developed and published in 2016 to huge success. At the time of IPO the game had more than 7 million downloads and generated almost $10m in revenue. tinyBuild were also the 3rd party publisher for a number of indie game titles at this time, but realized that IP-ownership was the better route to maximize success from gaming titles. This thinking led them to release their now wholly-owned hit called Hello Neighbor in 2017 which formed the start of a franchise that has seen more than 70 million downloads, 4 million books sold and more recently an animated series.

Around the same time they acquired a 49% stake in DevGAMM, an Eastern European-focused video game event organizer. The networking opportunities presented by the DevGAMM conferences lead to many of tinyBuild’s successful video games, either as 3rd party publisher or IP owner.

Their IP-ownership focus led tinyBuild to acquire a number of studios. In 2019 they bought Dynamic Pixels who were responsible for the development of Hello Neighbor in 2019. This was followed by three more studios in 2020. By owning the studio and IP as opposed to being a 3rd party publisher, not only could tinyBuild capture more of a game’s revenue as the IP owner, but they could also leverage off successful game IP and create additional gaming content (updates, downloadable content, spin-off games / sequels) which lengthen a title’s revenue runway in a less risky way. The 3rd party publishing is still extremely valuable, not only allowing tinyBuild to share in some of the revenue from successful game titles, but also allowing them to work closely with developers to find the right cultural fits for future studio and IP acquisitions.

In 2021 tinyBuild listed. Despite being a US-domiciled company with studios across the world including several in Eastern Europe (where Alex was born and raised), the UK’s AIM exchange was identified because it already had many listed peers of tinyBuild. Alex felt that in the US the company would invariably be compared to the AAA game developers and mobile juggernauts, and tinyBuild’s business model was different. They used their IPO proceeds to invest in more games and buy more studios. And they have used their listed equity to incentivise their staff and fund some of their acquisitions. The following diagram shows tinyBuild’s journey and the build-up of their substantial games portfolio over time to over 90 titles (owned and 3rd party) today: 

 

Late in 2021 Alex started becoming worried about the build-up of Russian troops on the Ukraine border. tinyBuild had about 180 staff in Russia and Ukraine. He worked with his team during this time of relative calm to plan the company’s actions under several conflict scenarios. When the “Code Black” scenario came to pass with Russia’s invasion, tinyBuild were ready and quickly worked on getting as many of their staff to safety, either out of Ukraine or to its western towns. They also evacuated many of their developers out of Russia, avoiding potential conscription. Staff were housed at his own property in the Netherlands as well as locations in Latvia and Serbia.  The company incurred significant costs ($1.7m in 2022, $281k in 2023) to help their employees and their families. (I recommend listening to the Game Maker’s Notebook podcast interview with Alex for more about the Ukraine situation and tinyBuild’s actions.)

In 2023 the company’s COO Luke Burtis resigned for family reasons following a lengthy period of paternity leave in 2022. The company’s CFO Tony Assenza also resigned a few months later for personal reasons. Luke was not replaced since the company had seen the need to move to a more decentralized model which gave their multiple studios the autonomy they require to make decisions and act swiftly. In the case of Tony, he has been replaced by Giasone (Jaz) Salati who was the head of investor relations. Jaz seems far better suited to the role than Tony as I’ll explain the management section below. 

This brings us to the latest earnings release for H1 2023 where tinyBuild declared a large net loss of $25.3m. $18.3m of this was due to the non-cash impairment of development costs to “reflect more competitive market dynamics”, having stopped the development on some more speculative game titles. Another $8.9m was the non-cash impairment of a quality assurance studio they acquired (alongside Versus Evil) called Red Cerberus, as well as a games studio called Not Games. Following a buoyant COVID period, the gaming industry has certainly come under pressure in the last 12 months with reduced sales and job cuts at many companies. Management appear to have been somewhat caught up in some of the market’s buoyancy and are now feeling the pain of some of some acquisitions made in that period. In addition, the recent downturn has affected tinyBuild’s “development services” (platform) revenue which they receive from platforms like Microsoft’s Xbox. These platforms pay for the development of specific games as well as exclusive titles or bundle fees (ie. inclusion in Xbox Game Pass or Playstation Plus). Notably the company made positive operating cash flow of $6m in the 6 month period to June 2023 and with more revenue traditionally concentrated in the second half of the year as well as recent new game releases not yet reflect in the earnings, I expect them to be comfortably profitable for the full year.

The share price graph below shows how the market reacted to the trading update at the start of July 2023 after the company announced lower expected revenue for FY23, revised their cash projections from $26.5m to a range of $10m to $20m, and told the market about Tony’s resignation. The large drop at this time from over $0.40 to below $0.10 can also be explained by a hedge fund with 5% of the equity dumping their tinyBuild shares in the open market.

 

 

tinyBuild key management

Alex Nichiporchik - CEO 

Alex Nichiporchik was born in Latvia and started gaming professionally when he was 14 by competing in tournaments for money. He soon realized that although he was a good gamer for the Baltic States, he wasn’t as good on the broader European stage so took his knowledge, quit high school and  became a game journalist to help support his family. His journalism gave him exposure in the industry and at 19 he was approached to lead development teams and become a game producer, initially for Xbox 360 games. On the side he was working on smaller personal projects, one of which was founding a website hosting tournaments for gamers playing Counterstrike, for which he charged a small fee. This taught him about online marketing which would be important later for tinyBuild’s publishing success.

Alex wanted to get into game development but opportunities were limited in Eastern Europe. He was working as a producer on some web flash games when he came across Tom Brien and an early flash version of No time to explain, which was the start of tinyBuild in 2011.

So in a relatively short period of time and by just 23 years of age, Alex had already played games professionally, produced games, engaged in online marketing to attract gamers and then started developing games. Along the way Alex made many contacts in the gaming industry and applied his knowledge as a publisher within tinyBuild. His marketing expertise saw them acquire a game events company called DevGAMM (disclaimer: it is 51% owned by Alex’s wife) which focussed on Eastern Europe and attracted many of tinyBuild’s current titles. tinyBuild’s marketing focus has not just been on the games themselves but also the company as a brand. This can be seen in their social media following compared to other (some much larger) gaming companies

 

 

tinyBuild grew through a combination of 3rd party publishing and IP ownership. Alex’s background had given him the understanding of what it meant to work with developers, who are largely creative individuals that are passionate about their art and need to be managed appropriately to get the best out of them. The company has shifted to a more decentralized approach in the last two years to give individual teams more autonomy (which creative people crave).  He comes across as a strong leader of people, illustrated by the way he handled the Ukraine crisis and looked after his employees at the company’s cost. Additionally, in an industry known for high employee turnover of around 15%, tinyBuild’s turnover is in the low single digits. Alex also understands the need for aligning incentives and this was one of the key drivers for the listing of the company.

Having listened to interviews with Alex, he is certainly no stranger to adversity. He grew up in a challenging part of the world and has overcome several obstacles to get to where he is. This bodes well for where tinyBuild is currently and for the need to adapt to a technological future that is difficult to predict. 

In 2022 Alex earned a salary plus bonus of about $500k. Even at the currently depressed share price his shares are worth almost 20x his annual earnings. He strikes me as resilient, passionate and has the broad and relevant experience (despite his age of just 35) to lead tinyBuild. In the 2022 annual meeting, Alex put forward a proposal to let him buy more shares. Since he owns more than 30% of the equity, Alex can’t buy more shares without putting forward a formal takeover proposal, so asked for permission to purchase equity without submitting a takeover bid. Shareholders voted against this request from Alex, but this does highlight his ongoing belief in tinyBuild.

  

Giasone (Jaz) Salati - CFO

Jaz was appointed to the board on 3 August 2023 after he was promoted to CFO on 29 June 2023. Jaz (48), who was previously the head of investor relations, replaces Tony Assenza who was the previous CFO. 

Jaz seems better suited to the role of CFO of a listed company. Tony was extremely limited in how he answered questions in the earnings calls and didn’t fill me with a great deal of confidence. Jaz has a listed equity background with his prior experience as a top equity analyst for Credit Suisse and Macquarie (#1 Stock Picker in 2019). More importantly he handled the most recent H1 2023 earnings call and subsequent investor questions with extreme professionalism and transparency. He didn’t avoid any of the difficult questions. Jaz seems better-suited to the role (at least from the outside) and it would be a great sign if he also acquired equity in the business.

  

Michael Schauble – CMO

Michael was appointed as Chief Commercial Officer in August from his role in Business Development. Michael previously worked at Microsoft for four years and was closely involved in Game Pass, amongst other things. I don’t know much more about Michael, but this connection to Game Pass, the gaming bundle of Xbox, should prove valuable for tinyBuild.

 

The gaming industry – high level overview for context

tinyBuild creates games to be played across multiple platforms. The main gaming platforms are PC, Microsoft Xbox, Sony Playstation, Nintendo Switch and mobile games on cell phones / tablets. Newer generation platforms like Meta Quest have also emerged recently for virtual reality game titles. Historically PCs have had access to more powerful hardware and software, offering a wider selection of games compared to other platforms. PCs also have broader applications beyond just gaming. PC therefore has the largest but also the most varied gaming audience, estimated at 1.75 billion gamers worldwide (note that these market stats all vary depending on the source). Next it’s the consoles with Playstation at 151 million, Nintendo at 87 million and Xbox at 63 million gamers. Mobile gamers account for more than 2 billion players, but the majority of this market play free games that are monetised through adverts or additional paid content. There are also new upcoming virtual reality (VR) platforms from Playstation, Meta and Steam, but these are still in their infancy. 

The largest open online platform for PC games is Steam, owned by Valve, with about 120 million active monthly users. Steam is an online store that sells games ranging from indie to AAA titles. Steam (like Xbox, Playstation and Nintendo) takes 30% of the gaming revenue for itself and passes the rest on to publishers and developers. All of tinyBuild’s games work on PC, and some are then ported to Xbox, Playstation and Switch to reach a wider audience. Certain games are also more suited to consoles. Porting to (or changing a game to work on) consoles can be expensive and sometimes costs more than actually developing an indie or AA PC game, so many games remain PC-only. The cost of porting also makes it a less feasible option for indie game developers without publisher support.

The consoles all offer gaming bundles, where a monthly subscription gives gamers access to a range of titles from indie to AAA games. These are Xbox Game Pass, Playstation Plus and Nintendo Switch Online. These platforms pay developers of selected game titles a negotiated fee to be included in these bundles, giving revenue certainty but capping the potential upside. The platforms have also been paying developers for exclusive game titles and to develop certain titles for their platforms. It's this revenue that has declined in the last 6 months and had the biggest effect on tinyBuild’s recent earnings. 

The video game industry is enormous and more importantly, growing. It is larger than Hollywood and the music industry combined. There are some real industry tailwinds with more and more people (young and old) spending increasing amounts of money on games. Reed Hastings, the CEO on Netflix, has said on numerous occasions that his company’s biggest competition is not another streaming service, but rather video gaming. Netflix are seriously exploring and testing a video game offering themselves. In addition, Microsoft has just bought video game developer Activision Blizzard for $69bn.

Approximately 40% of PC gamers globally come from Asia, 25% from Europe and about 10% from the USA. The average age of a gamer is estimated at 31 in Europe, 33 in the USA and a much lower 21 in Asia. 40% of gamers are female. The average gamer is estimated to spend about 7.5 hours playing games per week. Estimates vary, but the global gaming market is said to be worth about $250 billion annually (including mobile games). 

  

Understanding some gaming statistics and sales patterns

There are several sites that track the sales of PC games through Steam, providing a breakdown of game reviews over time, estimated game sales both in number of copies and revenue, follower counts and wishlist rankings. Since Steam doesn’t actually release their sales statistics, these tracking sites have algorithms that estimate the sales based on gamer reviews and some other publicly released statistics. These sales stats are not precise - I wouldn’t suggest trying to build revenue estimates using them - but are generally directionally valuable in assessing a game’s success. The sales stats from gamalytic.com claim to be 99% accurate on an aggregate level but on individual games they are within a 30% margin of error on 77% of titles and a 50% margin of error on 98% of titles. Estimates for larger games tend to be more accurate.

Wishlist rankings are a particularly good indicator for announced games that are yet to be released – gamers add games they like the look of to their wishlists and are then notified when updates for the game become available or it goes on sale. Games that rank highly on Steam’s wishlist rankings generally sell well at release, and then the reviews drive further sales if the game delivers on its expectations.

Gamers also write reviews of the games they play and on Steam these are classified as either positive or negative. A game’s overall review score is the proportion of positive reviews to total reviews received. The number of reviews and the review score also gives an indication of a game’s popularity. Consumers can rank games by their overall review score on Steam when deciding what games they want to purchase. There are thousands of games to choose from so reviews (and marketing) are important to stand out from the crowd. 

Importantly, there are no stats available for console sales. This is problematic in assessing the success of certain games that are more suited to consoles. A clear example here is tinyBuild’s number one hit franchise called Hello Neighbor, which the company has said experienced more than 70 million downloads (for the franchise), but PC sales estimates are in the low single-digit millions.

Sales statistics often start before a game’s official release date. This happens when games are put into “early access” where they are sold at a lower price for gamers to try out. Gamers who purchase early access titles understand that the game is still under development, so they are looking for potential rather than a complete game. Since a game takes anywhere from 2 to 5 years to develop, early access allows developers to gather data from players and test various elements of the game, giving them an opportunity to refine the game before official release. Early access also has the advantage of building a following amongst the gaming community and creating marketing hype for when a title is eventually released. Many of tinyBuild’s games are first released through early access (management have stated how they are data-driven in their decisions and early access is core to collecting that data), or alternatively they may release a free playable demo of the game which is generally more limited in its scope but acts as a marketing tool.

Many games are released in the second half of the year in anticipation of the holiday season. Game sales tend to be quite seasonal. In the US, the months of November and December can account for almost half of the game sales for the entire year.

  

tinyBuild’s most successful games – a proven ability to sell millions of copies and build franchises

The following table gives a summary of the top 30 selling games in the tinyBuild portfolio that were published by tinyBuild (as opposed to those published by the recently-acquired Versus Evil), ranked by estimated Steam PC revenue generated. The estimated revenue, copies sold, review score and copies sold in the last 7 days all come from gamalytic.com. Knowing that their figures are not exact, the site also gives a revenue range – the lifetime revenue shown is the midpoint of that range. I like this site because it estimates revenue which other sites like steamdb.com and steamspy.com do not, preferring to focus on copies sold, reviews and wishlist rankings. It's worth reiterating that 1) these are estimates based on an algorithm using select Steam statistics, and 2) these stats are based on PC Steam sales only not including consoles (which are a significant part, possibly as much as 50%, of tinyBuild’s business).