Translation: Original published in Finnish on 12/18/2024 at 7:45 am EET.

We reiterate our Buy recommendation and EUR 19.0 target price for Remedy. Over the years, Remedy has demonstrated its ability to develop games of very high quality, but this has not yet been reflected to the same extent in their commercial success for the company. As a result of years of work, the company has built its capabilities and resources to support a more frequent, even annual pace of new game releases over the 2025-2030 strategy period. Self-publishing will allow their financial success to be strongly reflected in Remedy's figures going forward, and with a hit game, the potential would be very significant. We believe that the current valuation of the stock provides an attractive risk/reward ratio to tap into the long-term potential of the company's ongoing game projects and its own game brands (Alan Wake and Control).

Long journey to multi-project model and self-publishing nearly complete

In 2017, Remedy began its transition to a multi-project model and value chain journey from subcontractor to independent game developer and publisher. Since then, much progress has been made and the company now has the resources and capabilities to develop two projects simultaneously in full production. The company has also built the capabilities to self-publish its own future games. Currently, the FBC: Firebreak multiplayer project is moving towards a 2025 release. In addition, the company has Max Payne 1&2 Remake in full production under the subcontracting model. Control 2, which is in the production readiness phase, is on track for full production in 2025. In addition, the company has a fourth, as-yet-unnamed game project in early conceptualization.

Targets for sustainable profitable growth by the end of the decade

Remedy aims to double its 2024 revenue by 2027 and continue to grow steadily thereafter. The EBITDA margin is targeted to reach 30% by 2027, and profitability is set to remain at least at this level until the end of the strategy period (2025-2030). Based on our projections, the target level would indicate an estimated revenue of around 100 MEUR, which is realistically achievable with a well-performing games portfolio. If the revenue target is roughly met, profitability is on track to meet the target.

Forecasts fine-tuned and major structural change to account for distribution costs

Remedy's move to self-publishing means that all sales of the company's own games will be reflected in the income statement, but the company will also bear the distribution and marketing costs associated with the release. We had already factored in rising marketing costs, but the cost of distribution platforms (assumed to be 25% of sales) was still missing from our forecasts. Taking these into account increased the revenue forecast but had a neutral impact on earnings. At the same time, however, we have refined and changed our assumptions for FBC: Firebreak and Control 2. We have therefore revised our forecasts for the coming years and the medium term. However, the overall picture of our forecasts remains unchanged, and in the medium term, the release of Control 2 (assumption H1'27) is the most important game project for Remedy's revenue growth in our forecasts.

Long game can be played with attractive risk/reward at current valuation

We believe in Remedy's ability to produce more quality and successful games over the long term, which makes the stock's current valuation (2025e EV/S 3.1x) attractive given its growth and profitability potential. The long-term potential is indicated by the value of the base case of the DCF model at EUR 26. However, the model is very sensitive to the success of future games due to the fixed cost structure and self-publishing. In an optimistic scenario, the stock could be worth well over EUR 50, while a moderate performance would put the stock at EUR 6-10. The exceptionally wide range is a good indication of both the potential and the risks associated with Remedy's stock.