Cheap Stock under $5 Gravity Co.

Quick Company Background

Trading just below NNWC and NCAV, Gravity is a Korean MMORPG (Massively Multiplayer Online Role Playing Game) company.

(For more information and insight, go through the GRVY discussion in the value investing forum)

The company released their most popular game, Ragnarok Online back in 2001 which went onto being adopted in Japan, China and other Asian countries and the popularity spawned off Ragnarok the Animation, Ragnarok Mobile, Ragnarok Online DS.

So we see that the success of one game can create multiple “child” products adding to revenue for the company.

But the company that once traded above $5 is now close to liquidation value. It’s risen a lot from its lows but still far too cheap.

Why GRVY is a Cheap Stock

Ragnarok Online was introduced in 2001 and 9 years later, the sequel still hasn’t been released. The company underwent several closed and open testing for Ragnarok Online 2 but during the final test phase, the reception to the new game was less than mediocre.

This prompted the company to completely revamp the game which equates to delays, and on the Street, uncertainty is the devil. No matter how much potential a company has, unless that potential is clearly visible, it is considered a dog.

At the moment, GRVY is getting the dog treatment. That’s where value investing comes in.

Understanding Multiplayer Gaming

At the moment the market isn’t pricing in any future outlook for GRVY. I don’t like talking much about growth but at $1.67, any future game that is released that generates cash is basically a free gift at the moment.

In Asia, multiplayer games are HUGE. Professional gamers make a good living in Asia and there are plenty of them. Unlike Western countries where sports plays a big role, Eastern nations are limited due to the geography, culture and advancement of the internet, are just some of the reasons why games play a huge role. You don’t see many PC cafe’s around anymore but go to Asia and they are on every street with people playing games all day and night.

Do a little research on StarCraft and you will realize that this multiplayer game was released in 1998 but professional StarCraft matches still take place.

Asset Valuation

The games business model is also a good one where Gravity receives royalties and fees for services to maintain, train, setup and fix the game servers. This consistent stream of revenue is why they have $54.6m in cash compared to their market cap of $46.7m.

No inventory, very low receivables and easily manageable debt displays the strength of the balance sheet.

  • NNWC comes out to $1.71
  • NCAV comes out to $1.91

From these numbers alone, you can see that even by ignoring all future growth and potential, it’s cheap with a valid business. But the truth is that GRVY is capable of profit. Although the realization of the stock price depends on how well the Ragnarok Online 2 is received, the downside is very well protected versus the upside.

Disclosure

I hold GRVY at the time of writing.

About Jae Jun


Jae Jun is the founder of Old School Value. He is on a mission to provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor. Keep in touch with Jae via any of the methods linked below.

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  • N

    Gravity’s entry in wiki shows a lot of past governance issues, is there any indication of the trustworthiness of the current management?

  • ryan b

    The gaming industry is as competitive as it gets. I am sure you have already answered these questions, but I would appreciate your thoughts on the following questions. 1) Was Ragnarok Online a fad in 2001? Is this proven by the recent test phase that you alluded to? 2) Does the company have any other profitable segments/games or will it continue to burn its free cash trying to make a come-back? 3) Does the company have the arsenal (cash resources/labour) to successfully compete in this market? 4) What is the catalyst if this game flops? Since the current price is not much off its NNWC.

    Sorry Jae Jun for all the questions. Just trying to figure out all the ways you can kill the company.

  • http://www.oldschoolvalue.com Jae Jun

    @ N,
    True. Governance has been an issue but a new team has been appointed in 2008. I can’t say for sure whether the new bunch is trustworthy, but it’s something to keep an eye on.

  • http://www.oldschoolvalue.com Jae Jun

    @ Ryan B
    Good questions.
    1. No it wasn’t a fad. The gameplay was very good and very addictive shown by how long it has lasted and the revenue it still brings in. The recent tests for Ragnarok 2 failed due to the gameplay. It didn’t meet gamers expectations which is why they have been spending time and resources to revamp everything completely. Rather than simple changes, they’ve completely changed the whole mechanics of the game.

    2. They do have other games. Not as successful as Ragnarok Online though. Check it out at http://www.gravity.co.kr/eng/index.asp
    Also check the photos.
    http://www.gravity.co.kr/eng/global/gravity.asp

    Another point I didn’t mention is that they are coming up with a way to plan the games via the browser. Previously you had to install the game but a non install, universal game, much like how Java games exist should help it even more.

    3. Plenty of cash. Biggest % of assets is cash and cash burn has been breakeven of late.

    4. Worst case is the stock trading at $1 again. However, this is would also represent the best entry point again, so either way, I win. Remember that with stocks trading less than NNWC, it’s hard to go any lower. e.g. my reason for buying IGOI last year was that they lost their biggest customer representing more than 30% of revenue, but the stock price didn’t budge.

    Although GRVY would go down somewhat, we have NNWC floor to protect us.

  • ryan b

    Jae, very much appreciate your candor and that you took the time to answer my questions. On a particular investment like this with NNWC of 1.71, what would be your typical entry point (margin of safety)?

  • http://www.oldschoolvalue.com Jae Jun

    I would prefer anything with about 15-20% MOS which is being extremely safe. But better safe than sorry.

    I bought at $1.57. I think this post increased the price and volume today..

  • Yar

    Nice post Jae. looks promising.

    Can u explain how did u calculate NCAV = 53?

  • http://twitter.com/raybonneau Ray Bonneau

    Jae, Thank you for writing about GRVY, which put this stock on my radar screen.

    If Gravity can release Ragnarok II I think things will pick up revenue and profit wise. In the latest earnings report, the virtual currency segment actually grew YoY. Virtually currency is becoming a big money maker, and with a new game release, I think this can grow quickly.

    I also like that they are addressing the mobile gaming space. Mobile gaming is a nice area to be in right now. I think this market can grow quite nicely over the years to come.

    Now with all the legal settlements out of the way, and hopefully an upcoming release of Ragnarok II Online I think that this stock is a good buy. I think the downside risk is minimal, while the upside is very attractive.
    .-= Ray Bonneau´s last blog ..raybonneau: I’m glad to see Scott Brown win the Massachusetts Senate Seat. Hopefully this will be a turning point for this country. =-.

  • http://www.oldschoolvalue.com Jae Jun

    @ Yar,
    NCAV = current assets – total liabilities.

    @ Ray,
    Thanks for the comment and RT Ray.
    As you pointed out, GRVY has many promising catalysts. The company is able to profit, good repeating revenue stream and downright cheap.

    If Ragnarok 2 is released anytime in the future, that news alone should create more enthusiasm for the company.

  • Yar

    Jae, if i’m not mistaken:
    current assets = 68.

    total liabilities = 18.9.

    NCAV = 49.1

  • http://www.oldschoolvalue.com Jae Jun

    Where are you getting the data from?
    I’m looking at the last 20-F since ADR’s don’t file quarterly reports and as of April 20, 2009 they had 56.8m in current assets and 15.1m total liabilities.

  • Yar

    OK. your new post about grvy is right and now we got the right number

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