Description
TinyBuild, a video game publisher and developer, focuses on indie and AA titles for PCs, consoles, and mobile devices. Founded in 2013 by CEO Alex Nichiporchik, who owns 37% equity, it was listed on the UK’s AIM exchange in 2021. The company's shares, initially priced at $3.02 and valuing the company at about $600m, have since dropped to $0.02, reducing its market cap to $5m. This presents an investment opportunity, albeit for a small position.
Investment Thesis:
1. Underpriced portfolio.
2. Founder's alignment and long-term vision in game development.
3. Undervalued game pipeline.
4. Potential for a high-impact hit game.
Even considering severe risks, the investment could yield significant returns, from 2.5x to 10x.
A brief history of TinyBuild:
TinyBuild, headquartered in the US with studios worldwide, chose the UK’s AIM exchange for its listing. The company invested IPO proceeds in expanding its game portfolio, now over 90 titles. In 2021, during the Russian-Ukraine conflict, TinyBuild relocated staff from Russia and Ukraine, incurring significant costs. In 2023, top executives resigned, and the company reported a net loss of $25.3m, partly due to market pressures.
Structure
tinyBuild has 12 internal development studios, oversees a portfolio of over 80 indie and AA game titles, with an additional 50 projects in development. Their top three titles contribute 38.5% of their revenue, and the top ten account for 67%, indicating a diversified revenue stream. The company aims to own intellectual property and create scalable franchises across various media, including spin-off games and linear media like books and animated series.
Video games can broadly be split into three types:
indie games; 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
AAA games; have large development and marketing budgets sometimes exceeding $100m, paid for by large companies, and sell for $40 - $70 each.
tinyBuild primarily focuses on indie and AA games, deriving 65-80% of their revenue from their own IP and the rest from third-party publishing. They aim for a minimum 2x return on investment per game title.
There are several reasons for the dramatic fall in the company’s share price:
The market for small tech corps with uncertain futures dried up in 2022
The game industry has come under pressure with reduced sales and layoffs by the largest firms [like Microsoft]
tinyBuild has made some mistakes, the main one being the acquisition of a 3rd party publisher called Versus Evil.
The company is now extremely small at a $5mill market cap, which takes the company off the radar of most investors.
TinyBuild’s most successful games
The following table gives a summary of the top 30 selling games in the tinyBuild portfolio that were published by tinyBuild.
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.
It's worth noting that old games continue to generate revenue for many years. Examples from the table include #1 Graveyard Keeper, #4 SpeedRunners and #9 Hello Neighbor, which have all sold hundreds of copies in the last 7 days yet were launched in 2018, 2016, and 2017 respectively.
This is a bit surprising. It means ongoing sales from older games is critical when assessing the earnings of tinyBuild; the company’s success is not purely based on coming up with a new hit game.
Investment Appeal:
Despite recent challenges, TinyBuild remains debt-free, cash-flow positive, and profitable. It focuses on long-term IP development and value creation. The company's portfolio shows a track record of successful game development, and there's potential for future blockbuster hits. The current valuation @ $5mill market cap offers a considerable safety margin.
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.
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.
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.
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.
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.
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.
Key risks
The industry downturn gets more severe than it already is. People temporarily stop entertaining themselves with new video games
The future tinyBuild games all bomb. Alex and his team are shown to be poor capital allocators (at least after the IPO) and blow all the IPO proceeds on dreams that come to nothing.
Management doubles-down and increases their risk. They don’t go free cash flow positive, dip into their debt allowance and over-commit on one or two game titles or new acquisitions that fail. This is probably the most plausible severe downside scenario but one that can be monitored.
At the core of all the risk is an unpredictability in the company earnings. The company’s success or failure hinges very much on capital allocation in a creative industry. By their very nature, hit games are often surprising.
This is not a AAA game developer where large, established game franchises guarantee some level of minimum earnings. Success is difficult to predict. In the case of tinyBuild there is at least a track record succesfull releases, a ceo aligned with investors, and diversified bets.
Buying shares
The share is listed on the AIM exchange but for non-UK investors that may not be accessible. Interactive Brokers lists the share under the ticker 8Z3 in Euros on the Frankfurt exchange, but does not provide trading statistics like the bid-offer spread. Look up the 8Z3 ticker on boerse-frankfurt.de for the bids and offers to give you an idea of where to make your offer on your brokerage account.
The incredibly small market cap has resulted in a large bid-offer spread, sometimes as much as 30%. This makes it more difficult to accumulate large blocks of shares – patience will be required. Also keep in mind that Interactive Brokers (and I’m sure other brokers too, but can’t speak to their processes) will cap your bid if it’s too far above the last price traded. You can contact them and ask them to increase their limits temporarily.
This all sounds like a real struggle, but this is partly why the share trades where it does. It’s not too difficult to buy decent amounts of the stock. If you’ve read this far I think you may agree it’s worth the effort. Also, if tinyBuild IR are able to sort out some of these issues with the likes of Interactive Brokers then it should bode well for those who already own the shares as they become more easily trade-able for the large US market.
Conclusion
TinyBuild's current valuation presents a unique opportunity for small investors. Despite recent challenges, its fundamentals, led by an aligned and capable founder, suggest a strong potential for future success. The investment carries risks, but the rewards, in my opinion, outweigh them substantially.
Catalyst
Free cash flow neutral in FY24 as guided to by management.
Successful game releases from pipeline in the next couple of years adding to revenue.
A higher price and market cap may make shares more easily buyable which can act as its own catalyst.