So the same capital allocation failure that depresses the stock also triggers PFIC status, further alienating US investors.. It's almost poetic.
Thans a lot for bringing that up, as a non-US investor I did not notice it.
Intuitively it does not feel that GRVY being PFIC is why this status was invented, since they're mostly making income from their operations, not their holdings.. but so much cash vs market cap + the royalty income, they trip that PFIC test it seems.
Dream Square isn't too much of a risk given GRVY contracts with most of the sub developers that were responsible for the underlying development of Dream Square games anyway - if anything, there's potential margin improvements by going direct.
The risk the market is pricing in is that they make a dumb acquisition to justify paying management higher salaries. Management owns no stock, so there is no incentive to unlock shareholder value through div or repos (which would also push the underlying price up, given the current cash drag).
Solid writeup on the capital allocation paradox here. The negative EV situation is wild, but the single-IP concentration risk probably deserves more weight than the comparables suggest. When nearly 100% of revenue ties to one franchise, the optionality around those 2026 launches isn't really 'free lottery tickets', its more like table stakes for not getting wrecked by franchise fatigue. I've seen simialr setups collapse faster than models predict once brand velocity stalls.
Good point, and maybe IP concentration should be considered a bigger risk, but I think it's important to distinguish Gravity from a true one-hit-wonder (one game, one cycle). Ragnarok IP is expressed through multiple games, genres, and platforms, with new titles launching 3-4 a year. The risk isn’t “one game misses,” it’s “the Ragnarok IP loses relevance,” which tends to play out gradually. Evidence so far is that the Ragnarok IP has grown its audience and monetization surface, not shrunk it, especially outside of home market Korea.
We see similar IP concentration elsewhere, too. CD Projekt is essentially The Witcher + Cyberpunk, Nexon still relies heavily on MapleStory, etc.. All that to say: strong franchises are a/the core asset in gaming.
And valuation matters here.. Even a fairly ugly outcome still struggles to justify today’s price. In an extreme scenario, liquidation value exceeds the stock which is still a bit bonkers to me!
This for some reason became a real hype and darling of the Nordic stock markets some years ago, thanks for the write-up!
My main concern, as you high-light, is the philosophy of these Far East BoD’s. It’s just so different vs. what we are used to in the Nordic and western stock market. For me, I perceive the risk as too high that they continue the shareholder unfriendly approach, and continue hoarding cash for another decade or so.
Interesting, I remember it was in the 2015-2020 very hot with the Swedish fintwit community, I did not know it was back in favor now. They had a good run back then, too.
I understand your concern, and it's a very legitimate one too. The flipside is the activist investor in GungHo + the policy changes in Japan pushing towards improved shareholder value, as they are trying to attract more foreign investments. But that is not a fast moving ship, and Gravity is Japan-owned but Korean-managed. But if you look at the growth in the Korean stock market in 2025, a dual-listing there could bring a lot of interest. They don't seem incentivized enough.
I would be encouraged by a small, smart acquisition (legacy recognizable IP, talented indie studio if one of the indie games they publish gets traction, etc.). Drecom revived the "Wizardry" IP beautifully this year, for example.
FYI this is a PFIC which is annoying for US investors
So the same capital allocation failure that depresses the stock also triggers PFIC status, further alienating US investors.. It's almost poetic.
Thans a lot for bringing that up, as a non-US investor I did not notice it.
Intuitively it does not feel that GRVY being PFIC is why this status was invented, since they're mostly making income from their operations, not their holdings.. but so much cash vs market cap + the royalty income, they trip that PFIC test it seems.
I guess will be interesting to experience that first hand next year, thanks
Dream Square isn't too much of a risk given GRVY contracts with most of the sub developers that were responsible for the underlying development of Dream Square games anyway - if anything, there's potential margin improvements by going direct.
The risk the market is pricing in is that they make a dumb acquisition to justify paying management higher salaries. Management owns no stock, so there is no incentive to unlock shareholder value through div or repos (which would also push the underlying price up, given the current cash drag).
Solid writeup on the capital allocation paradox here. The negative EV situation is wild, but the single-IP concentration risk probably deserves more weight than the comparables suggest. When nearly 100% of revenue ties to one franchise, the optionality around those 2026 launches isn't really 'free lottery tickets', its more like table stakes for not getting wrecked by franchise fatigue. I've seen simialr setups collapse faster than models predict once brand velocity stalls.
Good point, and maybe IP concentration should be considered a bigger risk, but I think it's important to distinguish Gravity from a true one-hit-wonder (one game, one cycle). Ragnarok IP is expressed through multiple games, genres, and platforms, with new titles launching 3-4 a year. The risk isn’t “one game misses,” it’s “the Ragnarok IP loses relevance,” which tends to play out gradually. Evidence so far is that the Ragnarok IP has grown its audience and monetization surface, not shrunk it, especially outside of home market Korea.
We see similar IP concentration elsewhere, too. CD Projekt is essentially The Witcher + Cyberpunk, Nexon still relies heavily on MapleStory, etc.. All that to say: strong franchises are a/the core asset in gaming.
And valuation matters here.. Even a fairly ugly outcome still struggles to justify today’s price. In an extreme scenario, liquidation value exceeds the stock which is still a bit bonkers to me!
Good stuff and lot of insights. Never even thought of this type of companies before, besides EA.
Thanks, it does come with its own "baggage" but I think its worth looking into ... there is also TINYBUILD but a lot riskier
This for some reason became a real hype and darling of the Nordic stock markets some years ago, thanks for the write-up!
My main concern, as you high-light, is the philosophy of these Far East BoD’s. It’s just so different vs. what we are used to in the Nordic and western stock market. For me, I perceive the risk as too high that they continue the shareholder unfriendly approach, and continue hoarding cash for another decade or so.
Interesting, I remember it was in the 2015-2020 very hot with the Swedish fintwit community, I did not know it was back in favor now. They had a good run back then, too.
I understand your concern, and it's a very legitimate one too. The flipside is the activist investor in GungHo + the policy changes in Japan pushing towards improved shareholder value, as they are trying to attract more foreign investments. But that is not a fast moving ship, and Gravity is Japan-owned but Korean-managed. But if you look at the growth in the Korean stock market in 2025, a dual-listing there could bring a lot of interest. They don't seem incentivized enough.
I would be encouraged by a small, smart acquisition (legacy recognizable IP, talented indie studio if one of the indie games they publish gets traction, etc.). Drecom revived the "Wizardry" IP beautifully this year, for example.
Interesting idea, my question is why their stock price exploded in 2020, despite the same list of negative factors (no shareholder return etc)?
This was the COVID gold rush combined with Ragnarok Origin Korea release.. tide lifted all the gaming companies at that time