Analysis: Asmodee is attractive, but not at any price

French gaming group Asmodee Entertainment is pursuing a strategy to turn popular board games into entertainment franchises, with film and TV adaptations and other extensions. Its recent acquisition of Fantasy Flight Games, and its licensing of Catan, will accelerate this strategy. However, the high valuation multiples at which Asmodee is trading suggest that the market is pricing in an extremely successful execution of the company’s strategy.

On Tuesday, Asmodee announced that it has acquired the remaining stake in Fantasy Flight Games that it did not already own, for $500 million. The transaction values Fantasy Flight at about 11 times gross profit, and appears reasonably priced considering the growth and margin potential of the business. The market seems to have focused on the potential for Asmodee to monetize the intellectual property of these popular games through sequels, merchandising, and adaptations for film and TV. But it is far from certain that Asmodee will successfully execute this strategy.

Asmodee has highlighted the momentum of its “Asmodee Entertainment” strategy, which aims to create “a universe of franchises” based on its games. The group reported that movie and series productions based on Asmodee games attracted 3.5 billion views in 2021, more than double the prior year. Asmodee expects this trend to continue, driven by increasing demand for “premium content” from streaming platforms. The group also cited the success of the “Universe of Magic: The Gathering”, where the brand has generated $1 billion in annual sales from merchandise beyond the game itself, as an indication of the potential for its other game franchises.

However, Asmodee’s track record so far in turning its gaming franchises into entertainment franchises is limited, and it is unclear whether it has the capabilities to generate substantial revenue from these opportunities. The group seems to be focused on extending its most popular games, such as Catan, which Asmodee recently licensed from its German creator, and “Ticket to Ride”, which Asmodee has already turned into a mobile game. But it is uncertain whether these games have the resonance with consumers to support further extensions. And Asmodee will face competition from other entertainment properties fighting for a limited pool of resources at streaming platforms and production companies.

The financial markets appear to be pricing in an extremely successful execution of Asmodee’s strategy, with the company trading at a forward EV/EBITDA multiple of nearly 20 times, well ahead of the consumer discretionary sector average of less than 10 times. Even if one believes that Asmodee can successfully turn its popular games into broader entertainment franchises, it is doubtful whether the company can generate enough additional revenue to justify this valuation. It therefore appears that the shares price correction following the acquisition announcement is justified given the risk to the company’s upside expectations that has been priced into the current valuation.