Is Nazara Technologies's growth strategy built to last or bound to bust?

Nazara Technologies , India's only listed gaming company, recently acquired Moonshine Technologies, known for its popular gaming app 'PokerBaazi'. This is the largest acquisition for the online gaming player, which has primarily scaled up by buying out its fellow competitors.

While the 'acquisition as a growth strategy' has definitely helped Nazara grab a significant market share, its financials have been a mixed bag. Though topline numbers continue to impress, with revenues topping Rs 1,156 crore (as of TTM September 2024), profits have largely remained flat. Will PokerBaazi's acquisition change its fortunes? To find out, we will need to first find out whether past acquisitions have borne fruit for the online gaming giant.

More acquisitions, more costs?

While acquiring competitors certainly bolstered Nazara's revenue growth, thanks to scaling up companies like Kiddopia, Sportskeeda, NextWave Multimedia and NODWIN Gaming, profits grew at a snail's pace. This sluggish growth can be attributed to the high client acquisition costs that come with buying more companies. Thus, despite a 35 per cent annual revenue growth during FY21-24, Nazara's net profit margin remained below 6 per cent. Similarly, during Q2 FY25, Nazara's revenue from operations surged by 7.3 per cent year-on-year, but earnings before interest and taxes (EBITDA) fell by nearly 10 per cent.

Not all segments earned high revenues

While Nazara has bought mobile gaming, esports and real-money gaming (RMG) under its umbrella, not all of them have delivered positive results. As seen in the table below, the company's esports division and gamified early learning, led by NODWIN Gaming, Sportskeeda and Animal Jam, have done well, while tech, gaming and RMG saw muted revenue growth during FY21-24.

Will PokerBaazi's acquisition turn Nazara's fortunes around?

Despite the growing popularity of esports and mobile gaming in India, Nazara's story of low profitability may likely continue, as even PokerBaazi's acquisition, which contributed 85 per cent of its parent company's (Moonshine) revenues in FY24, only had a 10 per cent share in its EBITDA. Further, an 18 per cent GST on online gaming may continue to pull down profit margins.

As new trends continue to emerge in the digital gaming industry, it remains to be seen how Nazara capitalises on it to boost its profitability. Yet, factors like declining valuations across the board and the company's poor capital allocation raise concerns about its profit-generating capabilities.

Lastly, the global outlook of the online gaming industry doesn't look very bright, as players around the world struggle with falling valuations and exorbitant earnings multiples. Nazara is already trading at a P/E of 85 (as of November 19, 2024), which makes us question: is the number justified? And how will this impact investors? Only time will tell.

Also read: Moving fast, growing slow: Story of FMCG companies in 2024