Expecting A Rise With The Tide With Ark

A Bridge Toward Profitability

A Swing Toward Positive Cash Flow Expected

Initiating Coverage: Perseverance To The Ark

Michael Kupinski

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Snail Inc.

Investment Appraisal&nbsp;
The company reported quarterly results largely in line with our expectations. Q1 revenue was $13.5 million and adj. EBITDA was a loss of $3.4 million, compared with our estimates of $12.5 million and a loss of $2.6 million, respectively. Figure #1 Q1 Results illustrates how the results compared with our estimates.
Management highlighted that the company expects to release a remastered version of its popular game ARK later this year. The game, which will be remastered using Unreal Engine 5, will be called ARK: Survival Ascended, and will feature the entirety of ARK: Survival Evolved, including previously issued DLCs. Management noted that core fans are excited about the upcoming release, which we believe could offer a favorable revenue boost during the lead up to the ARK 2 release in 2024. Notably, the company will be able to use ARK: Survival Ascended as a launchpad for additional DLCs in the future. Moreover, the remastered game will give gamers a glimpse into the improved graphics and gameplay that the company plans to build on with the release of ARK 2 next year. 
ARK 1 (ARK: Survival Evolved) continues to generate demand, as the company sold 1.6 million units in Q1, compared with 1.2 million units in the prior year period. The 400,000 additional units sold in in Q1, were due to promotional efforts by the companyâ€™s platform partners. Although demand is robust, management noted that the company typically offered a 30% price reduction on the game in Q1 compared with 2022 prices. However, this is expected, as the price of games tends to decline as games age. In our view, the sustained demand for ARK 1 is a favorable trend heading into the release of the remastered ARK (Survival Ascended) later this year. 
We anticipate that the company will swing toward positive cash flow generation in Q2 and remain in positive cash flow territory for the balance of the year, given the prospect for new releases. Flowing through the Q1 results to the full year, we are forecasting 2023 revenue of $94.0 million and adj. EBITDA of $14.0 million. In 2024, bolstered by the highly anticipated ARK 2 release, we expect revenue to grow to $167.7 million with adj. EBITDA margins of 37.2% ($62.3 million). &nbsp;
As of March 31, the company had $4.1 million in cash and a modest $16.0 million in debt. Based on our estimates, the company will swing toward cash flow positive in the current second quarter. As such, we believe the company&#8217;s cash on hand together with its cash flow generation provides ample liquidity to fund its product marketing and development. Notably, the company&#8217;s debt is renewable annually, providing additional financial flexibility. 
Near current levels, the SNAL shares trade at 1.2 times enterprise value to our 2024 adj. EBITDA forecast, at a discount to peers, which currently trade at times. Our price target of $9 per share reflects a target multiple of 5.5 times our 2024 adj. EBITDA forecast, which is closer to the peers average while leaving plenty of headroom for additional multiple expansion. Risks to achieving our price target include: poor macroeconomic conditions and dwindling disposable income, lower than expected adoption of the upcoming ARK II flagship game, and increased competition.
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Figure #1 Q1 Results
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/SNAL_20230511-01.jpg" style="width: 402px;height: 519px" />
Source: Company filings and Noble estimates

Snail Inc. (SNAL)

A Swing Toward Positive Cash Flow Expected

Fundamental Analysis:

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Expecting A Rise With The Tide With Ark (SNAL)

A Bridge Toward Profitability (SNAL)

A Swing Toward Positive Cash Flow Expected (SNAL)

Initiating Coverage: Perseverance To The Ark (SNAL)

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