The Secret GRVY Recipe to Produce 50% YTD

Written by

Jae Jun

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The Secret GRVY Recipe

  • ADR – Small Korean online game development company
  • Stock price below $5. “Was” trading below NCAV.
  • Dirt cheap fundamemtals for a profitable company
  • No chance for activism because of 51% owner
  • 7+ years of delays for game release
  • Catalyst of impending game release

Mix the ingredients together and you get a value investor’s dream dish in the name of Gravity Co (GRVY).

There is no need for me to go over everything again because I’ve written about GRVY numerous times. Several other value investors have also written detailed analysis of the company which I’ve linked to at the bottom of the page.

Right now, I just want to get straight into an updated valuation because YTD, GRVY has shot up 50% with increasing volume and it is a good time to review the probabilities of downside vs upside.

GRVY’s Impending Game Release is a Huge Catalyst

I am still very bullish on the company and the original thesis is still intact. GRVY is set to release the sequel to their blockbuster game after 7 long years of delays, redevelopment and more delays.

Waiting has been difficult because GRVY has a talent for announcing a release date and then delaying the date a month or so before the deadline.

But the company is finally entering their Open Beta test phase on Feb 22, which is a big step from Closed Beta testing and towards commercial launch set for March 2012.

It is one small step for GRVY, but one giant leap for shareholders.

7 years of disappointment and being ignored by Mr Market is about to end.

GRVY offers Downside Protection

First thing to consider is the downside. In the previous post where I detailed the market expectations of GRVY, I went through the NNWC, NCAV and tangible book value numbers to show the downside.

For a company that is

  • profitable and FCF positive
  • has very little debt
  • has plenty of liquid assets and cash
  • and has high margins

then the least it should be trading at is book value.

With the 50% jump since the beginning of the year, GRVY is now just above tangible book value.

Q4 results is not yet available to dig into, but based on Q3 results

  • NNWC value is $1.50
  • NCAV value is $1.78
  • Tangible book value is $1.99
  • Book value is $3.42
  • Current price is $2.15

GRVY offers Upside Potential

The current price still reflects a business that is selling for close to tangible book value.

At the current price, you are getting the portfolio of games, future of RO2 as well as additional revenue streams from licensing to other countries and growing mobile gaming revenue for free.

So what is the upside? Here are a few possible scenarios to consider.

Book value scenario: Suppose the market accepts the fact that the game acquisition prices are fair. Then the stock price should be at least book value instead of tangible book value.

That makes 1x BV = $3.42 a very reasonable target price. There is still 59% upside from today’s price of $2.15 to reach $3.42.

  • Zynga (ZNGA) is 11.5x BV
  • Glu Mobile (GLUU) is 4.4x BV
  • Majesco Entertainment (COOL) is 4.5x BV
  • A company like KONG that is bleeding money is 0.7x BV

If you take time to go through more competitors, you will see that profitable gaming companies tend to trade at about 4x BV.

As the other gaming revenues continue bring in additional revenue and RO2 starts commercial business, there is no reason why GRVY can’t be valued at a paltry 1x or even 1.5x BV.

At 1.5x BV, GRVY would be worth $5.13 which is 140% from today’s price.

EBIT Multiple Scenario: If GRVY has another profitable fourth quarter, my estimate for full year EBIT is $9m.

Based on my rule of thumb, a company like GRVY should be trading at 10x EBIT. On a per share basis, it is worth$3.30, but this value is based on the current EBIT ignoring future revenue increases.

Earnings Multiple Scenario: I’m estimating that fiscal year EPS will be approx $0.30 to $0.32. Again, this is based on pre RO2 revenue. Slap a multiple of 10x EPS and the target price comes to $3.00 to $3.20.

Valuation Scenarios

  • Conservative value: $3.00
  • Normal value: $5.00
  • Aggressive value: $7.00

Not saying that I am going to hold until $7 or even $5 because it all depends on how well the company markets and launches RO2 as well as expanding revenue from its other games.

But considering the bigger picture, the easy conclusion is that GRVY is still cheap at $2.15.

GRVY is still finger licking good.

Other Links

The Expectations Built into GRVY is Dead Wrong






Long GRVY at time of writing

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8 responses to “The Secret GRVY Recipe to Produce 50% YTD”

  1. jsarasin says:

    Very nice article to put the increase in recent share price in perspective. Agree with your valuations especially the normal value at $5. The $5 value is a very conservative value if RO2 brings in a nice chunk of cash.

    Depending on what ownership and management are going to do I could see myself holding on for a few more years. They will have so much cash which could turn into a catalyst just like RO2 at some point.

    Of course we should all revaluate at all times to see if you should sell.

  2. Graeme says:

    Feb 22 should be a fun day

  3. Joseph K. Teng says:

    Excellent article.

    Investors should also know that Gravity is also readying two of the top mobile social network games for FaceBook.

    This is major news from GRVY IR.

    Below is a redacted version of the email.


    Dear Mr. XXXXX

    Thank you for your inquiry again.

    As I answered in my previous email dated December 21, 2011, we are planning to issue a press release regarding (the date of) commercial launch of RO2 in February. While the date has not been finally confirmed, it will be someday after February 22, 2012, when open beta testing of RO2 starts.

    We understand US investors are interested in social networking companies and we intend to release Requiem and Emil Chronicle Online via Facebook within this year (it is in the course of preparation). A Facebook version of RO is not likely to be released in the near future because i) the license fees and royalty payments from our current local licensees are substantial and it is not clear that release of RO via Facebook will be more profitable for us; ii) our current license agreements for RO are quite complicated (each has different terms and expiration date); and iii) we cannot prevent users from logging in from certain country (as Facebook is open to all), which may result in current licensees not paying licensee or royalty to us if they do not technically have “exclusive” distribution rights in their service territory. As for RO2, as it is still under development, the most urgent and important matter for us is to launch it as a perfect stand-alone MMORPG first.

    Should you have any further questions, please let me know.
    Thank you very much for your continued support.

    Kind regards,
    Yoon Joo Lee
    IR Manager
    Gravity Co., Ltd.

  4. Jae Jun says:

    Thanks for that additional info from IR.

  5. Graeme says:

    Might have to change that headline to say 70% 🙂

  6. Jae Jun says:

    Always happy to be wrong on these things 😉

  7. Joel Birkitt says:

    Jae – great website and excellent call on GRVY! Thanks for your sound and logical analysis – much appreciated. Joel

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