(News Bulletin 247) – The bank raised its opinion on the stock by two notches, from “underperform” to “buy” on the stock. Jefferies is enthusiastic about the release catalog, the orientation of the group’s model towards more recurring revenues, a change in cash generation and its low valuation.

Jefferies makes a U-turn on Ubisoft. The bank completely changed its gear on the independent French video game publisher, going from “underperform” to “buy” on Monday, which is equivalent to going from sell to buy. Jefferies also raised its price target to €29, compared to €21.5 previously. At Friday’s closing price (€19.66), this target gives Ubisoft shares a potential upside of almost 50%.

This double recommendation raises Ubisoft on the stock market, with the share price rising 8.3% to 21.3 euros at the start of the afternoon, marking by far the biggest increase in the SBF 120.

Ubisoft is currently trading at a discount to its competitors, which Jefferies believes is too high “in a world that has a critical need for content.”

The bank believes that there are many catalysts that could enable Ubisoft to close its stock market discount.

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Promising games

Jefferies, for example, is excited about the company’s upcoming “AAA” (blockbuster) games, namely Star Wars Outlaws, a game in the Star Wars film franchise focusing on the crime of the fictional universe, and Assassin’s Creed Shadows, an installment in the Assassin’s Creed saga (which has sold more than 200 million games) featuring samurai. The first game will be released on August 30, the second on November 15.

Jefferies cites a “robust” release catalog based on “proven” licenses. The bank even believes that Assassin’s Creed Shadows could be in the running for game of the year.

Beyond this catalog, Ubisoft is especially highlighting a reorientation of Ubisoft’s economic model. The video game group announced on January 15 a name change for its streaming offers (subscription gaming), Ubisoft+. With, in particular, the possibility of subscribing to Ubisoft+ Premium (which offers access to new releases as soon as they are released) for $17.99 per month.

For Jefferies, these announcements mark an important strategic shift for Ubisoft, which is moving more towards a subscription-based economic model.

“We believe this approach has financial benefits for Ubisoft by enabling stable and recurring revenues, while strengthening customer engagement and expanding market reach,” the bank wrote. This improves its stock profile because the market grants more generous valuations, in the software sector, to groups with a significant share of recurring revenues.

Promising subscriber recruitment for Ubisoft+

With the releases of the two Star Wars games and Assassin’s Creed, but also the arrival by the end of the 2024-2025 financial year (end of next March) of the Activision Blizzard licenses (Warcraft, Diablo, Overwatch) on Ubisoft+, the streaming service should record a record year of subscriber growth in 2024-2025, according to the establishment. “We believe that if Ubisoft decides to disclose this figure (subscriber growth, editor’s note), it will lead to an appreciation of the stock’s multiples,” Jefferies writes.

In fact, the bank goes so far as to write that Ubisoft’s new monetization tactic shows that the video game developer “doesn’t want to sell games anymore.” Jefferies means that the company should prioritize subscription over front-end sales of games.

Jefferies supports this observation in particular with the different prices offered on its site for the future releases of its major games. In addition to the standard editions ($69.99), gold ($109.99) and ultimate ($129.99), the group is offering to switch to Ubisoft+ at $17.99 per month, with the advantages of the ultimate edition.

The bank notes that this latest offering is highlighted in blue on its page. “We believe this is the model that Ubisoft wants the greatest number of consumers to purchase, hence the blue highlighting,” it deduces.

Jefferies estimates that a three-month subscription to Ubisoft+ can be more profitable than a pure and simple purchase of the game. Still according to the bank and more broadly, a subscription can even be 30% more profitable for Ubisoft than the pure and simple purchase of a game.

Jefferies also believes that Ubisoft+ is a platform with lower costs and better margins than Microsoft’s Game Pass or Sony’s PS Plus.

“The reason is that these latter services have to spend significant recurring costs to renew licenses and maintain content on their subscriptions. This is not the case for Ubisoft. We believe that the Ubisoft+ ecosystem alone could be worth as much as the Ubisoft Group today,” the establishment explains.

The bank’s final point: after burning cash over its last four financial years, Ubisoft’s 2024-2025 financial year could mark a “turning point” on this point. Which could appeal to some investors who have so far refused to take a position on the stock due to its cash burn.

Ubisoft expects to generate positive free cash flow in the current financial year. Jefferies assumes a figure of €142.6 million.