A Positive Flip Side To The ARK Delay?

Expecting A Rise With The Tide With Ark

A Bridge Toward Profitability

A Swing Toward Positive Cash Flow Expected

Michael Kupinski

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Snail Inc.

Investment Appraisal
The company reported a better-than-expected quarter with revenue of $9.0 million, exceeding our forecast of $5.8 million, illustrated in Figure #1 Q3 Results. Adj. EBITDA for the quarter was a loss of $5.1 million, in line with our forecast. 
Following the conclusion of Q3, the company released ARK: Survival Ascended, which is a re-release of its original ARK: Survival Evolved using Unreal Engine 5. Unreal Engine 5 offers the latest technology for gaming engines, allowing for improved graphics and a better player experience. The improvements allow the new release to fetch a retail price of $45 on Steam, meaningfully more revenue per unit than the original game, which is now roughly $15 per unit, due to its age. The October launch of ARK: Survival Ascended was very successful, as it was the #1 selling game on the PC gaming platform, Steam, on launch day. Management noted that, so far, the game is performing 60% better than expectations, in terms of units sold. Importantly, the new release does not appear to be cannibalizing daily active users for the original game (ARK: Survival Evolved), indicating that the new game could be broadening the user base for the ARK franchise. 
We are maintaining our Q4 forecast and flowing through the upside revenue variance from Q3 to our full year estimate. As such, we are raising our 2023 revenue forecast from $67.1 million to $70.3 million. Our adj. EBITDA forecast is largely the same, at a loss of $0.8 million. Notably, Q4 should benefit from the strong performance of ARK: Survival Ascended. Importantly, the performance of Survival Ascended will likely be bolstered by its release on Xbox and PlayStation, expected before the end of November. Figure #2 Forecast Revisions illustrates the changes to our model. &nbsp;
As for 2024, we are lowering our forecast, which reflects a more conservative timeline for the release of ARK 2. We believe ARK 2 may not be released until sometime in Q4, or even early 2025. However, we believe this is in large part a result of the strong performance of ARK: Survival Ascended. In our view, management may choose to focus on releasing DLCs for ARK: Survival Ascended in late 2024, should demand remain strong. Doing so could also help expand the user base for the franchise, paving the way for a successful ARK 2 launch. For 2024, we are lowering our revenue forecast from $167.7 million to $99.0 million and lowering our adj. EBITDA forecast from $62.5 million to $16.5 million. Our 2024 forecast does not build in the launch of ARK, which could occur in Q4. As such, we view our forecast as conservative. Moreover, we view the potential delay of ARK 2 to 2025 not as a setback, but rather a strategic decision to realize greater value from ARK: Survival Ascended. 
Looking ahead to 2025, we anticipate that the revenue will grow to $175 million, on back of ARK 2, which is based on a release date early in the year. We are forecasting adj. EBITDA of $68.0 million, due to the relatively stable operating cost structure, which indicates meaningful operating leverage. Our 2025 forecast is detailed in our model, later in this report.&nbsp;&nbsp;
As of September 30, the company had $4.9 million in cash and $13.7 million in debt. We believe the company should have sufficient cash to fund game development costs into 2024, given its successful recent game launch. Notably, we anticipate the company to generate positive cash flow in Q4 as well as for the full-year 2024.
Near current levels, the SNAL shares trade at 3.5 times enterprise value to our 2024 adj. EBITDA forecast, at a discount to peers, which currently trade at roughly 11.5 times. Our price target of $9 per share reflects a target multiple of 5 times our 2025 adj. EBITDA forecast, which is closer to the peers&#8217; 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 Q3 Results
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/snal-3q23-results-11-23.jpg" style="width: 455px;height: 622px" /> 
Source: company filings and Noble estimates
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Figure #2 Forecast Revisions
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/snal-revisions-11-14-23.jpg" style="width: 468px;height: 436px" /> 
Source: Noble estimates

Snail Inc. (SNAL)

A Positive Flip Side To The ARK Delay?

Fundamental Analysis:

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A Positive Flip Side To The ARK Delay? (SNAL)

Expecting A Rise With The Tide With Ark (SNAL)

A Bridge Toward Profitability (SNAL)

A Swing Toward Positive Cash Flow Expected (SNAL)

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