Cyberpunk 2077 Let The World Burn

Courtesy of CD Projekt

The economics of a videogame publisher are a lot like a movie studio, where a blockbuster can make or break a company.

Optimism was high for Warsaw-listed CD Projekt (ticker: CDR.Poland) ahead of the release of the Cyberpunk 2077 videogame, which features an actual Hollywood star, Keanu Reeves, and has been in development since 2012. But the release has been reminiscent more of Reeves flops such as Johnny Mnemonic than hits like The Matrix.

Sony Group (SONY) hasn’t allowed the Cyberpunk 2077 action game onto the PlayStation store because it’s so buggy, and Microsoft (MSFT) has put a warning notice on the XBox version.

Shares of CD Projekt have tumbled 38% in 2021, the third-worst among Stoxx Europe 600 companies, and the stock has dropped nearly two-thirds from its 2020 high.

Adam Kicinski, joint chief executive of CD Projekt, tried to put an upbeat spin on the game on an earnings call to discuss the company’s worse-than-forecast 65% drop in profit in the first quarter. “We can definitely observe a downward trend here,” he said, referring to the frequency with which the game crashes. “Given the recent improvement and motivation we have, we strongly believe that the game will prove a success in the long run.”

Short sellers are circling. Of the nine short positions that are large enough to be disclosed by Poland’s financial regulator, five are bets against CD Projekt.

On the other hand, Cyberpunk revenue represented nearly 60% of sales in the first quarter, even without it being on the PlayStation store, which would ordinarily be its second-biggest marketplace behind personal-computer downloads. The company declined to disclose overall Cyberpunk unit sales, or average selling prices.

On the analyst call, the company was peppered with questions about how many staffers are assigned to Cyberpunk 2077. Kicinski said there are about 300 people. Other videogame developers typically have thousands of staffers on a single game. Kicinski said CD Projekt is in an “intensive hire” process, and is looking to add workers in the Vancouver area in particular.

Analysts at Credit Suisse say the stock trades at about 29 times estimated 2022 earnings, a 25% premium to the sector, which they say is unjustified given the uncertainty of Cyberpunk and the small number of franchises it owns.

The U.K. activist investor Abri Advisors is now calling for the resignation of Kicinski and co-founder Marcin Iwinski—not an easy task, given that insiders hold a third of the company.

Abri CEO Jeffrey Tirman told Bloomberg News that the management couldn’t have intentionally made as many mistakes as it did. He said he wanted the company to put forward a public plan on how it intends to address its shortcomings and repair its brand. Tirman told Barron’s he didn’t wish to elaborate on his remarks.

The biggest bull is Alexei Gogolev, a J.P. Morgan Cazenove analyst who has a 330 zloty ($90) price target. The stock traded at a recent 169.76 zloty.

“Sony is likely to return CP77 to its digital store over the coming months, which we consider a key driver for investor and gamer sentiment around the game,” he wrote in a note to clients. “Assuming Sony resumes CP77 sales on its platform, we think the next big catalyst will be the release of the next-gen version, due to come out later in the year.”

The release of a Netflix (NFLX) television show based around its Witcher videogame, as well as a new version of the medieval fantasy game, could boost sales of that series in the second half of the year, he added.

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