Swedish gaming studio Toca Boca looks set to be sold, but is it undervalued?

This was originally published on Tech.eu

This week brought reports that Stockholm-based gaming studio Toca Boca who specialise on creating ‘non-competitive’ games for children are set to be sold by their owners Bonnier for 500 million – 1 billion SEK (or between $59 million and $118 million)

In my own brief on the news, I noted that I felt the asking price felt a little bit low considering their apps had been downloaded at least 70 million times (The Guardian actually reported 85 million downloads two weeks ago) and they’d seen a 28% increase in net sales in 2014 to just short of $10 million ($9.67 million to be exact).

In order to get a better understanding as to whether they were being undervalued I decided to compare their numbers with some other Nordic gaming companies that have exited in recent years.

It should be noted that Toca Boca is a different kettle of fish to the likes of King (Candy Crush), Supercell (Clash of Clans) and Mojang (Minecraft), but nonetheless it does provide us with a suitable yardstick for understanding the value of a gaming company originating from the Nordics.

With the valuation pegged to be between $59 million and $118 million, for the sake of this analysis, I’ve gone straight down the middle and assumed that Toca Boca will be sold at $88.5 million.

With Toca Boca predominantly aimed at children, and with strong ethics regarding in-play purchases (none of their games include them), it’s no surprise to see that their net sales significantly pale in comparison when it comes to the others:

This means that their net sales multiple to valuation is the highest at the time of (potential) exit, with net sales of $9.67 million vs. a potential $88.5 million exit, compared to Mojang’s $325 million vs. a $2.5 billion exit, King’s $1.88 vs. a $7 billion exit (market cap is now $4.12 billion) and Supercell’s $892 million vs. a $3.1 billion exit.

When it comes to net sales then, Toca Boca actually looks overpriced when compared to the money-making machines of King and Supercell, with the picture looking even worse when it comes to profit:

However, as noted above, Toca Boca is not a traditional gaming company, and although net sales and profit serves as a useful guideline, it should be noted that ‘ethical’ apps for children will never be able to compete with freemium games when it comes to billion-dollar revenues.

But one area where Toca Boca’s potential exit value does compete with the likes of Mojang, King and Supercell is downloads:

And this perhaps demonstrates where the true value of Toca Boca lies, in the brand and merchandise, as with 85 million downloads across its games, they certainly have the potential to excel in this area.

In fact, rather than looking at Nordic gaming companies that have already exited, it’s worth comparing Toca Boca to one that hasn’t, that’s also gone down the merchandise and franchise avenue: Rovio.

Once talked about as being worth as much as $9 billion, more recent estimates have valued the Finnish gaming studio behind Angry Birds at $2 billion, but in truth, they’ve struggled a lot in the last 18 months, including losing nearly half of their workforce, and in all honesty I would be shocked if they were still valued at anywhere near $1 billion.

With a lack of accurate information surrounding their worth, it’s a little tricky to compare Toca Boca’s numbers with Rovio’s in the same way we did above, however, there are still some useful insights to be gleamed from Rovio’s download and revenue numbers.

As of January 2014, games in the Angry Birds series had been downloaded an incredible 2 billion times, yet strong revenues have still proved tricky for the company, with a revenue of ‘only’ $179.5 million last year, with operating profit around $13.5 million.

Downloads have never been an issue for the company, with their latest game Angry Birds 2 beingdownloaded 50 million times since being released last month, yet even yesterday came news thatRovio were to let go 260 staff more, showing that many downloads does not equal success.

And, this is where the challenge lies for Toca Boca, in terms of their future and their potential worth.

Although Rovio proves that downloads doesn’t necessarily add up to a billion-dollar business, I still feel a 1.04 multiple on downloads to valuation is way too low for Toca Boca, especially when you consider that they have never been about maximising revenue through their games, something that Rovio set out to do. In fact, you can even make a case for the fact that Toca Boca have been better at monetising than Rovio, with total downloads divided by net sales a multiple of 8.79, compared to Rovio’s 13.97.

Toca Boca are also market leaders in the kids gaming space (although Disney doesn’t reveal numbers, it’s a pretty safe assumption to make) which comes with its own value too, as well as having a licensing and merchandise business aimed at a market which love to buy things, children.

In many ways, Toca Boca’s supposed valuation has been affected by the woes of Rovio, however, I feel that Toca Boca offers strong brand potential still, and although revenues are low, for them to be making money in this space (and for them to be growing) is impressive enough for me to have faith in them that they will be able to continue to do so, and at a rate that defies a $88.5 million valuation.

For me, the top end of the given range would be my starting point, and I believe their true value should sit somewhere between $120 million and $240 million, so, if the reports are accurate, then someone is about to have a bargain on their hands.