The number one European video game Embracer collapses on the stock market

The story looks like the last hours of the transfer window in football where clubs still have the right to recruit a new player to strengthen their workforce. Except for Swedish Embrace – first European market capitalization in the video game for almost two years -, the scenario did not turn to the “happy end”.

“Late last night, we were informed that a major strategic partnership, which has been negotiated for seven months, will not materialize”, confided, this Wednesday morning, Lars Wingefors, the boss of Embracer – during the presentation annual results in which he intended to include the financial consequences of this “deal” which was to result in particular in more than 2 billion dollars in “development income over a period of six years”. A tidy sum for a group which generated 3.2 billion euros in turnover in its 2022-2023 financial year, which closed at the end of March.

Stock price down sharply

Implicitly, Embracer has significantly lowered its forecast for its next financial year. From now on, the Nordic firm is counting on a gross operating surplus of between 657 million and 845 million dollars, against almost double according to the group’s most optimistic scenario before the agreement, with a mysterious partner who has never been named by Lars Wingefors, does a condom this Tuesday night.

Result, the price of Embracer collapsed by more than 40% on Wednesday, reducing its market capitalization to nearly 2.5 billion euros. This represents an 80% drop since its peak two years ago at 13.1 billion. Historically, such a level had never been reached by a European video game company; which had then allowed Embracer to p in front of the tricolor champion of the Ubisoft sector which again became, on Wednesday, the market leader in the sector on the Old Continent.

Very intense external growth

Still, the evil is probably deeper for Embracer, which saw its organic turnover decline by 4%, over one year, between January and March. “The history of this group is a bit like the fable of the frog who wanted to be bigger than the beef”, compares an expert. “It’s a company that has done a lot of external growth and it’s a model that the financial markets have loved in recent years. But there, trouble begins for them.

Gearbox (behind the video game license Borderlands), Middle-earth Enterprises, (a firm owning the rights derived from the work of JRR Tolkien), the Lara Croft franchise rights Saber (behind the games “World War Z” and “SnowRunner”), but also the French nugget of the board game, Asmodée or Dark Horse, the third comic book publisher in the United States…: in recent years, Embracer has multiplied acquisitions at the pace of Formula 1, for a total amount approaching 10 billion euros since 2020 , and now finds itself burdened with a net debt of nearly 2 billion.

Over 200 games in development

Long darling of the financial markets and a real UFO in the sector, Embracer is almost like a giant video game investment fund, leaving a lot of freedom to its development studios and not seeking synergies at all costs. A model that has its virtues. But the group’s workforce has increased by more than 650% in four years, from 2,208 people to 16,601 employees today. In all, the group has 138 development studios in 40 countries and has 221 games under development. Astronomical numbers…

“Of course, content is king. But there, with the size they have reached, it has become unmanageable to follow all the projects of all the studios, points out a good connoisseur. And in the end, the fundamentals remain the same in this industry: you have to release good games and as much as possible on time.Launched last summer, “Saints Row” – a high-end game in which Embracer had injected more than 100 million dollars of development budget – resulted in a commercial flop.

In recent weeks, the group has also postponed several big games – capable of generating nearly 100 million net revenues for the year – which were expected in its current fiscal year and are now planned for 2024-2025. Another explanation for the stock market slap inflicted on the group this Wednesday, which will now have to recover.