Shares of Ubisoft Entertainment rose on Wednesday following an upgrade from BMO Capital Markets.
At 5:33 am (0933 GMT), Ubisoft Entertainment was trading 5.1% higher at €12.44.
This upgrade, which elevates Ubisoft’s stock rating to “outperform” from “market perform,” is based on an insightful valuation analysis by BMO Capital Markets that flags the company’s current undervaluation and considerable future potential.
BMO Capital Markets’ analysts point out that Ubisoft shares are trading at approximately 2.7x FY26E EBITDA, a contrast to the company’s 10-year forward average of 10.5x EBITDA.
This valuation represents a 75% discount compared to historical norms, indicating that the stock is significantly undervalued at its current levels.
“While the initial 3P data suggests a softer launch (Star Wars Outlaws) than expected, it remains too early to call the game a flop, especially given our expectation that Outlaws should be a strong holiday title with longer-tailed adoption,” the analysts said
They argue that “Star Wars Outlaws” could still prove to be a strong performer in the holiday season, given its potential for longer-tail adoption. BMO plans to keep a close watch on the game’s sales channels to gauge its performance further.
Going forward, the November release of “Assassin’s Creed Shadows” stands out as a catalyst for Ubisoft. While there has been some initial pushback from gamers concerning a key character in the game, Ubisoft management remains positive.
The company has flagged recent successes within the “Assassin’s Creed” franchise and expects that “Shadows” will achieve record-breaking sales.
Current consensus forecasts suggest the franchise will sell about 10 million units in FY25E, surpassing its 17-year historical average of 8.9 million units sold within the first 12 months.
Financially, Ubisoft is navigating a cost reduction program aimed at saving €200 million, of which about €150 million has already been realized.
With €1.2 billion in cash as of March 31, 2024, and expected free cash flow generation in FY25E, Ubisoft is in a strong position to manage potential financial challenges.
The company has also signaled its readiness to pursue additional cost-cutting measures if needed.
In their revised outlook, BMO Capital Markets has adjusted FY25E and FY26E estimates, lowering projections for net bookings and operating income by 3% and 4.5%, respectively.
The new estimates place net bookings at $2.34 billion and operating income at $397 million, now 5% and 3.5% below consensus expectations.
Consequently, BMO has reduced its target price for Ubisoft shares to €22, down from €27. Despite this adjustment, the valuation remains attractive, reflecting a substantial discount to the historical average EBITDA multiple.
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