Ubisoft: Peak Uncertainty
I purchased shares in Ubisoft today for the first time ever, at 4.70. This may come as a surprise because I have been telling everybody the company is dogshit for at least three years. That view is changing and I believe the company is at peak uncertainty, with direction of fundamentals now moving in the opposite direction of the stock price.
Originally, it was clear that Yves Guillemot was flailing and unsure how to get the company to the next level. However, the company also has very strong core franchises that are growing well, and obvious opportunities to improve e.g. productivity.
If the cost structure improved and the franchises kept growing, it was probably a $30 stock. However, if Guillemot didn’t get his shit together, it was a $10 stock. I spent 2023 and 2024 buying put-call spreads and selling each leg for 30-50% gains. I did this like five times. This was the original thesis I articulated in 2024:
Meanwhile, Guillemot kept selling the furniture to heat the house with Tencent trying to edge him out. It became clear to me that Guillemot was going to run the company into the ground and I told everyone it was uninvestable (it was). The stock is down 75% since then.
You can see a full history of my comments here:
ubisoft (from:10footinvestor) – Search / X
I’m not going to resummarise three years of work because frankly I have other, more important things I am focused on right now (see Fireside – here).
But I want to write this down because I focus on management quality turnarounds and this is the exact type of situation I look for – where qualitatives are moving in the right direction masked by near-term quantitative noise. Here is the pitch.
Bear case:
- skilled but unmotivated CEO with a terrible leadership style, more concerned with his position and his legacy than the financial success of his company
- historically mismanaged and currently extremely low-morale company
- tonne of debt, distribution sucks (paying rent to Steam; no distribution it controls)
- lowest productivity of any game company in the industry
- just cancelled a bunch of titles (near term earnings hit)
- talent departing
- incrementally selling the crown jewels to tencent
- poor product judgement and mis-investment (e.g. rabbids, NFTs)
- CEO jumps in wrong direction / acts out of desperation
Why I think now is the time to do the work and the company is at peak uncertainty:
- Finally got serious about focus, layoffs, and productivity. Once this all washes out it probably works out to a ~20% headcount decline in last 2-3 years. Full impact of this is still coming through.
- Change in studio structure similar to what CD Projekt (another management turnaround I’ve invested in) resulting in better creativity, better delivery at scale, and much better link between creativity and implementation
- Company has suffered enough (see: stock price) to finally motivate and catalyse the man to act
- The core franchises are exceptionally strong, with more focus this may be enough to give you leverage / room to move on distribution
- Got the CoD distribution rights from Microsoft. Ubisoft got this because it’s a badly mismanaged company who will never be a threat – but – they do know how to sell shooters and this is earnings accretive
- unnecessary product development killed & unlikely to recur (cancellations today)
- debt and FCF constraints greatly limit the direction the CEO can take; I believe this + Tencent will channel focus in right direction
That’s the high-level TLDR. Falling stock price changes Guillemot’s leverage and the equation quite drastically and you can see Tencent successfully chiselling out concessions. I think this will be enough to cause Guillemot to act and the leverage of Tencent will channel that energy in the right direction.
The downside here is very obvious. I have started with a very small position; I think the play here is very similar to Metro Bank or CD Projekt. There is a path, the path has milestones which indicate uncertainty reducing (reduced debt, lower cost structure, improved rev per headcount, free cash flow generation, + a bunch of stuff on the product and distro side). You watch the path and buy the stock, or sell it. All will become obvious in time.
YMMV.
I own shares in Ubisoft and CD Projekt. This is a disclosure and not a recommendation. I do not work as an investment adviser / equity analyst. Do your own work.
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