Gaming stocks tumble after disappointing Q4 results

Shares in South Korean gaming companies have been on a losing run since the start of the year, giving up about half of the gains they enjoyed late last year.

Poorer-than-expected earnings in the fourth quarter precipitated the decline in their share prices, cooling the hype around their new games and forays into play-to-earn (P2E) and non-fungible-token (NFT) games.

Following their disappointing quarterly results, analysts cut their target prices for Korean game developers, as central banks' tightening moves are expected to spur money outflows from growth stocks, vulnerable to higher interest rates.

Krafton Inc., the developer of the popular battle royale game PlayerUnknown’s Battlegrounds (PUBG), on Thursday reported much worse-than-expected operating profit for the October-December quarter of last year. Its operating profit of 43 billion won ($36 million) missed the market consensus by 80%, reflecting hefty employee incentives.

The stock plummeted 12.8% to end at 259,000 won on Friday, down 55% from its 2021 peak. It underperformed a 0.87% drop on the main bourse on the day.

Shares in WeMade Co. tumbled 10.1% to 95,800 won, losing 61% from its 2021 high. That compared with a 2% decline in the broader Kosdaq market on Friday.

On Wednesday, the creator of global MMORPG blockbuster Mir, said its fourth-quarter operating profit fell short of market expectations by 63%. The results excluded the income from the sale of its digital coin WEMIX. MMORPG is short for a massively multiplayer online role-playing game.

BELOW EXPECTATIONS

WeMade is the first South Korean developer to apply the P2E gaming model. Its share price had skyrocketed by more than 10 times in almost two years, following the release of the overseas version of Mir4, a P2E game. 

Mir4 was expected to make Wemade a game-changer in the industry, leading the paradigm shift for the P2E model. But its global sales missed market expectations.

Krafton, backed by China's technology giant Tencent Holdings Inc., late last year launched PUBG's next-generation version New State, but the video game failed to make a hit.

EMPLOYEE INCENTIVES

Korean game publishers bumped up incentives for employees to attract and retain talent amid the industry's pandemic boom. The incentive packages sharply bit into their fourth-quarter earnings.

Krafton spent 59 billion won on stock options for employees in the fourth quarter, up 772% on-year.

Analysts said gaming companies need to prove the commercial success of their new games and produce tangible results for their announced plans to venture into P2E and NFT-incorporated games.

P2E games currently are banned in South Korea because of their speculative nature.

"To justify its current valuation premium, Kakao Games need to prove the success of its new games and make tangible results in the P2E game arena," said eBest Investment & Securities analyst Sung Jong-hwa.

Kakao Games' flagship game Odin and Netmarble's Second Country both suffered a drop in sales. Fourth-quarter earnings at Kakao Games and Netmarble Corp. missed analysts' forecasts by 23% and 19%, respectively.

Kakao Games' share price dropped 1.3% to close at 70,800 won, and Netmarble was down 1.3% to 99,700 won. Compared to their 2021 peaks, the stocks have dropped 40% and 34%, respectively. 

Shares in NCSoft, the publisher of the mobile game Lineage W, plunged 7.1% to 511,000 won, ahead of its release of 2021 results next Tuesday. 

Saudi Arabia's Public Investment Fund has built up its stake in NCSoft to 6.69%, on the heels of the sovereign wealth fund's $883 million investment in Nexon Japan.

Write to Sul-Gi Lee at surugi@hankyung.com
Yeonhee Kim edited this article