After recently trading around levels last seriously breached nine years ago, Ubisoft Entertainment (OTC:UBSFF, EPA:UBI) shares have been given a double upgrade over the video games publisher's strong pipeline and subscriptions model.
The Assassins Creed maker was upgraded to 'buy' by Jefferies from its previous 'underperform' rating, with analysts at the investment bank hiking their share price target to €29 from €21.50, eying almost 50% potential upside from the last close price.
Analysts believe a combination of a strong 2025 pipeline based on proven games series, a "real focus change in monetisation towards recurring revenues", a move into positive free cash flow after four negative years and the current "low valuation" will all combine to trigger a share price re-rating.
Ubisoft's rebranded subscription service, Ubisoft+, launched on January 15, was seen as a significant move towards trying to generate more recurring revenue, though investors have been unsure.
Having topped €80 during the pandemic, the shares dipped from the €30s seen last year to below €20 several times this year, with results in May casting some doubts about how well the 'live service gaming' model was working.
But Jefferies believes FY25/26 is a "transition period when the subscription opportunity will become evident".
The subscriptions approach "provides financial benefits to Ubisoft through enabling stable and recurring revenue, whilst it enhances customer engagement and expands market reach", the analysts suggest, while noting that stable recurring revenue businesses are more highly valued by the market.
According to the analysts, a subscription model can be 30% more profitable for Ubisoft compared to upfront game purchases, with the company breaking even if a player is subscribed for three months compared to purchasing a game.
"Ubisoft doesn't want to sell games any more."
While some investors have been hesitant due to Ubisoft's lack of positive FCF in the past four years, the analysts expected next year to see an "inflection" with incremental capital chasing the stock as cash flows improve.
Net bookings estimates for 2025 and 2026 were increased by 15-18% by Jefferies following the Ubisoft Forward event, with analysts seeing "multiple catalysts ahead to unlock this value discrepancy" in the coming two years.