An EM Stock Story: CD Projekt

  • The Fundamental Growth and Core Equity team’s research process focuses on five key attributes that are likely to lead to sustainable growth.
  • Viewed through the lens of that research process, Poland-based gaming firm CD Projekt is a stock to watch.
Senior Equity Research Analyst

Emerging market (EM) equities volatility has persisted this year in an environment of slower global growth and greater economic uncertainty caused by the COVID-19 pandemic. Around the world, however, gaming companies appear to have benefited greatly from changing lifestyle and mobility trends, which could accelerate as the northern hemisphere enters the winter season. In general, the video game industry appears to be entering a high secular growth phase, one in which game developers that provide high-quality content, leading to long-term sustainable growth, are valued at a premium versus the market.

The Fundamental Growth and Core Equity (FGC) team’s research process helps identify investment opportunities using a framework called Confidence Quotient (CQ), which focuses on five key attributes of a company that are likely to lead to sustainable growth (see Figure 1). These attributes are qualitative and forward-looking, relying upon the expertise and judgment of our analysts. Viewed through the lens of the FGC research process, the Polish video game creator and distributor CD Projekt could be a stock to watch.

Confidence Quotient: Fundamental Growth and Core Equity’s Framework for Assessing Company Quality

Management team

Conviction in leadership

Market position

Sustainable competitive advantage

Fundamental momentum

Current business trends


Visibility of the business model

Financial condition

Strength of the financial model

Source: State Street Global Advisors.

Video Game Industry

Video game publishers are experiencing strong secular growth in consumption of video game content across platforms. Newzoo, the world’s most trusted and quoted source for games and esports analytics and market research, forecasts the global video game industry to grow at a 9% CAGR over the next three years. Demand growth is also being fueled by a growth in cloud gaming, which lowers consumers’ barriers to entry (no need for an expensive console) and could lead to industry consolidation. There is also a scarcity of creators of games IP (intellectual property); therefore, companies that can retain top talent will perform better over time.

CD Projekt Franchises

After achieving extraordinary success with The Witcher1  video game franchise, Poland-based CD Projekt is about to release Cyberpunk 2077, which has the potential to become one of the biggest franchises in a secular growth industry. Cyberpunk 2077, is an open-world, action-adventure role-playing game (RPG) set in a dystopian future that is heavily reliant on hi-tech robotics. It is scheduled to be released in December 2020, after several delays. Hollywood actor Keanu Reeves plays an integral character within the game and has been key to the game’s marketing strategy.

This release will propel CD Projekt from a single-IP company with long gaps between new games to one with a more regular release schedule. After the release of Cyberpunk 2077, we expect 3-4 expansions for the game over the next couple of years, including a multi-player version in 2022. This will likely be followed by a new The Witcher game in 2023 and possibly another Cyberpunk game in 2025. A third franchise may also be in the works, but it is too early to speculate. Also, the company is developing a mobile game, The Witcher: Monster Slayer, which will be the firm’s first step into the fastest-growing segment of the video gaming industry, mobile devices.

Key Company Attributes

Management’s philosophy is to deliver top-quality AAA2  games in the RPG genre with complex, nonlinear, and deep storylines. CD Projekt has a strong reputation among gaming fans for ultra-high-quality work – The Witcher series has won more than 800 awards, including the prestigious “Game of the Year” titles in 2015 and 2016, and was included in Game Informer’s Reader’s Choice Top 300 Games of All Time.

CD Projekt’s stellar reputation has helped generate substantial enthusiasm for the Cyberpunk 2077 franchise. Having a proven track record of creating deep and engaging content and not burdening customers with microtransactions in the games has earned them a very strong and loyal customer base. In the gaming industry, we believe that customer satisfaction and loyalty are key to driving long-term sustainable earnings growth.

With the release of Cyberpunk 2077 in December, and increased video game demand due to the pandemic-related lockdowns, momentum for CD Projekt is very strong. Secular growth in the industry is a positive force for the company as well. The firm’s transformation from a single-franchise video game developer to a multi-franchise player will ensure a more stable revenue and earnings stream. Entry into the mobile games market in 2021 with the release of The Witcher: Monster Slayer will further solidify their position in the fastest-growing segment of the video games industry. The firm’s current marginal presence in the Asian video game market represents another potential growth opportunity.

The video game industry is notoriously secretive about future business plans due to the level of competition between developers. Therefore visibility into the business model isn’t ideal, but the pipeline of announced releases by CD Projekt provides some measure of anticipated revenue growth. CD Projekt also has a very strong balance sheet with no debt. Margins are strong and on an improving trend, while cash flow generation is expected to pick up substantially with the release of Cyberpunk 2077. Although the company’s current valuation appears to factor in a successful launch of Cyberpunk 2077, it does not fully price in a sustainable pipeline of large AAA titles.

Closing Thoughts

Emerging European countries have very few technology-driven investment options. Poland-based CD Projekt is a unique investment opportunity, given that most of its competitors are in the United States and Asia. With the highly anticipated release of Cyberpunk 2077 in December 2020, the company will become a multi-franchise developer with many avenues to revenue and earnings growth. The firm’s large base of loyal fans will likely grow with the success of this latest project. We therefore feel positive about the long-term potential of this company as it transforms into a global player.

This information should not be considered a recommendation to invest in a particular security or to buy or sell any security shown. It is not known whether the securities shown will be profitable in the future.