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Valuation at rock bottom; strong Buy

Concerns over The First Descendant seem overblown

Nexon Games’ market cap is currently W1tr, similar to what it was before the launch of The First Descendant. We believe the current share price reflects excessive concerns over the new title’s performance. Although traffic has decreased from initial levels, the game should provide a strong profit pipeline (potentially contributing around W100bn to annual operating profit). With The First Descendant, we also believe the company has demonstrated strong multi-platform game development capabilities, which could serve as a re-rating factor.

In 2H24, we expect The First Descendant to generate gross revenue of W340bn, comparable to the levels of AAA console games. Notably, even the popular looter-shooter game Warframe had a rocky start but succeeded thanks to user-friendly updates and open communication. In the same way, we think The First Descendant could see a recovery in traffic through active outreach efforts and updates.

Blue Archive continuing to fare well

Blue Archive has grown into a top-tier game in Japan, with ongoing cross-media activities helping to boost its popularity. Its global monthly active users (MAUs) are hitting new highs even though IP extension efforts have yet to begin. We think revenue could receive a strong boost from platform and genre expansion/diversification, as seen with Honkai: Star Rail (HoYoverse), the Fate series (Type-Moon), and The Idolmaster (Bandai Namco).

Blue Archive is generating average daily revenue of around W1bn. We expect the title’s gross revenue to reach W360bn annually over the next three years, with its operating profit contribution exceeding W120bn. Based on this profit estimate, a back-of-the-envelope valuation using a 10x multiple would imply a value of W1.2tr for Blue Archive alone. And we note that IP extension efforts could accelerate growth in revenue/profits.

Maintain Buy and TP of W28,000; top pick among small/mid-cap game stocks

We believe Nexon Games has hit bottom levels and recommend accumulating shares. The stock is trading at a 2025F P/E of 13x, the lowest multiple among major domestic peers, and a 12-month forward P/S of 2.8x, the lowest level since the merger in 2022.

Despite the market’s disappointment over weak PC traffic for The First Descendant, Nexon Games recently noted that undisclosed data on console users/revenue were very strong. We expect shares to bounce back once PC traffic stabilizes. New title momentum from 1H25 also looks strong, with Project DW currently under development (target release in 2025).