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Ubisoft Entertainment SA
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==== Investment Thesis ==== Recommend a Neutral rating for Ubisoft. Despite having a strong line-up for FY2024, which includes four AAA titles, there are challenges to consider, such as a difficult market with fierce competition from other developers and the possibility of delays in game releases. However, Ubisoft does possess robust development capabilities and a diverse portfolio of brands that could drive revenue growth and margin expansion in the long term if current issues are resolved. The company's new strategy offers significant upside potential, which could be underappreciated by the market. Ubisoft trades at a 50% discount compared to its gaming peers, well below the 5-year average discount of 33%. This discount seems to be influenced by investors' perception of elevated execution risk at the company.<ref>Deutsche Bank. (2023) Deutsche Bank FY-23 Preview Closing chapter</ref> While a certain discount is warranted due to Ubisoft's track record, it can be argued that the current discount is disproportionately large, especially considering the potential of its new strategy and the associated transmedia effect. Although the strategy may take time to materialize fully, it could lead to substantial benefits for Ubisoft in the future. Furthermore, Barclays reports that the largest AAA games have recently outperformed while smaller AAAs have underperformed: "Our 7 interviewees noted that improvements to the stickiness of the major games and their ability to keep gamers within their ecosystem were a major competitive factor in the AAA market. They also felt it was becoming more difficult to deliver success in 1-5m unit AAA games. They pointed to the squeezed consumer as exacerbating rather than creating this trend." This new trend reinforces the fact that Ubisoft's new strategy to focus on their core franchises, most of which are considered 'Mega games', synergises with structural changes in the industry and is the right path of action.<ref>Barclays. (2023) Ubisoft, Embracer and CD Projekt: Mega games getting bigger?</ref> However, consensus analyst reports don't seem to have the same opinion, and view the execution risk as significant. Furthermore, from gamer sentiment on the key franchise trailers, it can be seen that gamers are tired of recycled content. So, if Ubisoft focusing on their core franchises means recycling content, that could be met with significant negative reactions. Therefore, it may be prudent to sit and watch how Ubisoft develops over time.
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