Starbreeze Q4'24: Low expectations presents opportunities

The top and bottom line aligned quite well with our estimates, even though the revenue mix was a bit surprising. No concrete details were provided on the second-year roadmap for PAYDAY 3 ("PD3"), as these are still forthcoming, while discussions with potential Project Baxter partners are ongoing. The current share price reflects very low market expectations, and with reduced short-term financial risks, we believe this presents a potential contrarian opportunity for risk-tolerant investors. We reiterate our Accumulate recommendation and raise our target price to SEK 0.24 (was SEK 0.22).

Q4 aligned with our estimates, but the revenue mix surprised

Starbreeze’s Q4 revenues amounted to 46 MSEK, slightly exceeding our estimates (43 MSEK). PD3 revenues fell unexpectedly 8 MSEK quarter-on-quarter to 14.7 MSEK (Q3’23: 23 MSEK), falling short of our 26 MSEK estimate, as player activity remained low, coupled with the lack of paid content releases, during the quarter. Meanwhile, PD2 revenue remained stable at about 10 MSEK (Q3’24: 11.5 MSEK), while third-party publishing (“3PP”) revenue came in well above our forecasts (Q4’24: 15 MSEK, est. 7 MSEK). In addition, Starbreeze received 5 MSEK from its work-for-hire agreement with KRAFTON, which was earlier than we had expected, and was the sole reason for the slightly higher-than-expected revenue in Q4.

EBIT improved quarter-on-quarter to -52 MSEK (adj. Q3’24: -63 MSEK), aligning well with our estimates, supported by higher revenue, a lower SG&A cost base, and reduced game development amortization. The cash position declined by some 57 MSEK to 192 MSEK due to continued high investments, unfavorable working capital changes, and negative earnings. To enhance cost efficiency, Starbreeze announced measures to lower its fixed cost base, including redundancies primarily within marketing and publishing, potential foreign entity closures, and a head office relocation. These actions, combined with the KRAFTON partnership, are expected to reduce cash burn during what we anticipate will be a transitional 2025 leading up to the Baxter release in 2026.

Our broader estimates remain relatively unchanged

Our overall outlook for PD3 remains unchanged, as we continue to see a significant resurgence in player base and revenue as unlikely. However, the sharper and earlier-than-expected decline in PD3 revenue, combined with the lack of concrete details on its second-year roadmap, has led us to lower our PD3 estimates for 2025. Despite this, our total revenue estimates remain largely intact, as higher 3PP projections offset the PD3 revisions. Additionally, we have made minor downward adjustments to our cost estimates, particularly within SG&A expenses. The overall impact on free cash flow remains limited.

We remain cautiously optimistic about the stock

Since our last update (Dec 2024), the share price has risen ~ 13%. Despite this, valuation remains low in absolute terms (2025e EV: 116 MSEK), reflecting subdued market expectations for the PAYDAY franchise and the upcoming Baxter release. While we largely share this cautious outlook, we believe that recent cost-efficiency measures and the KRAFTON partnership have reduced the short-term financial risks. That said, the investment risk remains high, but we believe the low absolute valuation presents an opportunity for a contrarian stance. Any positive news regarding PD3 or Project Baxter (particularly during its marketing phase) could provide upside potential for the stock. However, our patience is limited. Should PD3 activity decline further, early signs of weak interest in Project Baxter emerge, or Starbreeze's financial situation deteriorates, we will not hesitate to adjust our view. Our DCF model, which reflects a moderately optimistic scenario, values the share at SEK 0.41 (was SEK 0.39). However, we still believe the DCF provides limited near-term support as the share price remains closely tied to PD3’s performance and the upcoming Baxter release.