Introduction
At Microcap Review, we like to write about micro-cap stocks on SA, and today I’m taking a look at Snail (NASDAQ:SNAL). It’s a video game developer and publisher that listed on NASDAQ in November 2022 through a lackluster initial public offering. In my view, the Q1 2023 financial results were underwhelming, but the company could be in the black in Q3 thanks to the release of an enhanced edition of its flagship game in August. Yet, my rating on the stock is neutral at the moment due to stock dilution concerns. Let’s review.
Overview of the business and financials
Snail was founded in January 2022 for the purpose of completing an IPO of Snail USA, the US arm of Chinese online game developer Suzhou Snail Digital Technology (Snail Games). Snail USA was responsible for bringing Snail Games products to audiences in North America, South America, and Europe, and today, Snail’s flagship franchise is an open-world dinosaur survival sim named Ark: Survival Evolved that was launched in 2015. At the moment, almost 90% of Snail’s revenues come from the USA.
The company’s games portfolio also includes Last Oasis, PixARK, and Dark and Light among others. As of March 2023, the total playtime for the ARK franchise stands at 3.2 billion hours.
Regarding the IPO, I think it was underwhelming. Snail initially planned to raise between $25 million and $35 million but the operation was downsized to $12 million to $18 million in October. The company ended up raising $15 million in November through the issue of 3 million Class A shares at $5 per share. As the share price sank by 55% on the first day, Snail launched a $5 million share buyback which boosted the share price to $2.98 after hours. As of March 2023, Snail had repurchased 1,350,275 shares at an average price of $2.72 (see page 17 here) but the share price is less than a third of the IPO price.
Turning our attention to the Q1 2023 results, I was positively surprised by the strong engagement as ARK: Survival Evolved averaged a total of 276,144 daily active users ((DAUs)) compared to 257,168 DAUs a year earlier. In addition, Snail sold a total of 1.6 units of the ARK franchise versus 1.2 million units in Q1 2022 thanks to an increase in sales promotions offered by its platform partners. In my view, these are impressive figures for an eight-year-old video game, and seeing a growth in the user base for such a mature franchise is unusual. Yet, the sales promotions led to a significant decrease in the average selling price (ASP) which led to a $3.1 decline in ARK sales. In addition, one-off contract payments slumped by $8.5 million while sales of Snail’s other titles went down by $0.7 million. This led to a 52% slide in net revenue to just $13.5 million and EBITDA was negative $3.4 million. Bookings, which represent products and services sold digitally or physically and exclude the impact of deferrals on revenues, slumped by 47.6% to $13.3 million.
Looking at the one-off payments in Q1 2022, they included mainly a $4.8 million title license agreement with a platform for Ark: Survival Evolved and Ark 2 (the upcoming sequel to the game) as well as a $3.5 million deal to make Ark: Survival Evolved available on a platform for a period of 5 weeks (see page 12 here). In my view, it’s likely Snail will book more such one-off payments in the future but it’s impossible to forecast their amounts or when they might take place.
Looking at the balance sheet, I think that the situation is starting to look dire as cash and cash equivalents declined to $4.1 million as of March 2023 while net debt came in at $12.5 million.
What’s even more concerning is that management expects that the company won’t be in compliance with its quarterly debt covenant for Q2 2023 (see page 10 here). Snail needs to maintain a minimum debt service coverage ratio of 1.5 to 1.0 under its 2021 Revolving Loan, Term Loan. and the 2022 Short Term Note. In my view, this could push the company to tap the equity market in the near future which would lead to significant stock dilution unless the share price recovers soon.
Overall, the financial situation of Snail looks grim, but I think that the company is likely to be in the black in Q3 2023 as Ark: Survival Ascended, an Unreal Engine 5 enhanced edition of Ark: Survival Evolved, is set to be released in August 2023 on PS5, Xbox Series X|S, and PC. There have been leaked photos of people playing Ark: Survival Ascended over the past few days so that the release of the game won’t be delayed, and I expect this game to boost Q3 2023 net revenues to at least $25 million. Looking further ahead, Ark 2 is set to be launched in 2024 which could be a game-changer for Snail, but I’m concerned that the new game could be delayed into 2025. Ark 2 was first announced in 2020 and was initially supposed to be released in 2022 before being delayed into 2023.
Investor takeaway
Ark: Survival Evolved remains a popular video game despite being released back in 2015 but Snail slipped into the red in Q1 2023 due to a lack of one-off contract payments as well as lower ASP. I expect the company to be back into the black in Q3 as it seems that Ark: Survival Ascended is on track to be released in August. Yet, the balance sheet looks weak, and I’m concerned that there could be significant stock dilution over the next two months, and this is why my stance on the stock is neutral for the time being.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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