Here is the tension that runs through the whole story. Strip SpaceX down to the parts you can actually underwrite — rockets and satellite internet — and you get a serious, defensible, highly profitable company. You do not get a trillion-dollar one. The gap between “great business” and “trillion-dollar business” is filled by something far harder to price: an AI operation the company was barely discussing a year ago, and the open-ended optionality that attaches to anything Elon Musk touches.

So the cleanest way to think about the stock isn’t as a rocket company at all. It’s a call option — and you can size it in one line. The parts you can comp, launch plus Starlink, are worth roughly $250 billion (Starlink at ~$8B of free cash flow and ~25x is about $200B; add the launch franchise and you’re near a quarter-trillion). Against a market cap near $1.75 trillion (as of Aug 7, 2026), the market is paying roughly $1.5 trillion for everything else — almost entirely an AI story. That subtraction is the thesis. Everything below argues whether the premium is cheap or a mirage.

A Real Business Wrapped in a Call Option

When Tesla went public, the market wasn’t paying for the cars sold that year — it was paying for the right to own whatever Tesla might become. SpaceX rhymes. There’s a core business that makes money, and then the Elon layer stacked on top: space, connectivity, the advertising scraps from X, AI, and a grab-bag of whatever else Musk wills into existence.

A call option is a premium you pay for the right to buy something later at a fixed price. That is precisely the shape of SpaceX’s market cap. Whatever number you call “fair,” you’re assigning a value to launch, a value to connectivity, a small value to advertising, a value to AI — and then a large, squishy premium for optionality on top.

The base business is more real than skeptics admit. Fold in X and revenue runs around $18.5 billion, with gross margin near 50% and EBITDA margin around 35% — roughly $6.5 billion of EBITDA. The catch is on the cash flow statement: SpaceX generates about $6.8 billion from operations and then burns roughly $20 billion on capex, split across the space build-out and the AI build-out. This is not a company drowning in free cash flow. It’s a company spending like it believes something enormous is on the other side.

The segment split tells you where the money actually comes from — and it isn’t where the headlines are:

• Space/launch: ~$4 billion

• Connectivity (Starlink, plus some government/enterprise): ~$11.4 billion

• AI: ~$3.2 billion

Read that again. Before the AI narrative took over, the biggest business at SpaceX was selling internet, and the rockets were the smallest slice.

One distinction to hold before going further: that ~$3.2 billion is recognized AI revenue. In a few sections you’ll meet a $26 billion AI figure — a forward run-rate on two cancelable leases, not recognized revenue. They are not the same unit. Don’t let the eight-fold jump read as growth you can bank; the entire AI-valuation question lives in the gap between those two numbers.

Launch: The Foundation Nobody Can Match

Give SpaceX its due — this is a generational company, and launch is why. Putting a kilogram of mass into orbit used to cost around $18,500. On Falcon 9, SpaceX drove it to roughly $1,400 — call it a 90% cut. That isn’t an incremental win. It’s the kind of step-change that creates entire industries downstream, Starlink being the first and most obvious.

The scale is almost comical. SpaceX flies around 165 Falcon launches a year and accounts for more than 80% of all the mass humanity sends to orbit — from a single company. There is no credible second place; the nearest competitors fly a handful of times a year. The mechanism is reuse: individual boosters have reflown 20 times, and recovery is now routine.

But launch is also a mature business. Falcon is only partially reusable — the second stage is still expendable — and it has likely pushed about as far down the cost curve as its architecture allows. Which is exactly why the next chapter matters.

The Starship Bet

Starship is the attempt to buy a second step-change: full reusability — the upper stage too, the whole vehicle caught and reflown — paired with sheer size, so each launch throws far more mass. If it works, it’s plausibly one of the great engineering achievements in the history of spaceflight.

If.

Starship has flown multiple times and pulled off the “chopstick” catch, which is genuinely stunning to watch. It is not proven. The hard problems are still open: controlled descent and engine relights have been mixed; orbital refueling has never been demonstrated at anything near this scale; the reusable heat shield is one of the nastiest materials problems in aerospace; and all of it has to work at high cadence, not once for the cameras. The bull owns every one of those unlocks. The bear only needs a few to stay unsolved longer than the market’s patience.

And the real competitive threat isn’t Blue Origin. Blue Origin is the only other private player with the balance sheet and engineering depth to matter someday — but after two decades of funding, it has flown New Glenn only a handful of times and is likely 3–5+ years behind, with high-cadence reuse still undemonstrated. The threat that actually matters is

China — and the interesting part is why. China doesn’t need to out-engineer SpaceX to hurt it; it only needs to be good enough to stop buying launch and to take its own domestic and allied mass. A state-backed program with national will can keep copying the playbook until it works. It’s probably 5–10 years out too — but it changes the market’s structure, not just the leaderboard.

Starlink: The Boring Cash Machine

If launch is the foundation, Starlink is the payoff — the least exciting and most valuable part of the story. Satellite internet with 60%+ margins and 10 million-plus subscribers is not a science project; it’s a proven model, with a long history of public satellite-telecom comps — Intelsat, Eutelsat — to value it against. If SpaceX were only a satellite-telecom operator that happened to own its own launch, you could value it with a straight face and land nowhere near a trillion dollars.

That’s the point. Launch plus Starlink is a wonderful company — and, as the arithmetic up top showed, worth on the order of $250 billion. It is not, by itself, a $1.5 trillion company. So where does the rest come from?

AI: Where the Trillion Actually Lives

Here. This is where it lives.

Launch and connectivity, valued honestly, don’t reach the market cap. To justify the number you have to believe SpaceX will also be a serious AI player — and over the past year it moved to make exactly that claim, seemingly overnight. The xAI merger and the Colossus supercluster turned SpaceX into an AI company by corporate fiat, bolting a frontier-model ambition onto a rocket balance sheet.

There are two lenses for judging whether the bet pays. One is architectural — where in the stack value accrues, from chips and data centers up through models to applications. The other is product-shaped — what people actually pay for, and whether any of it defends a margin. The uncomfortable answer is that the AI frontier is proving hard to hold on both.

Take the popular “China just distills our models for pennies” line, which is half right. Distillation and fast-following genuinely let competitors reach good-enough cheaply — you can approximate an expensive model’s outputs at a fraction of the training cost. But distillation gets you good-enough, not ahead; you can’t distill past the teacher. Where Chinese labs are genuinely competitive at the frontier, that’s real engineering under export-control constraints, not copying. The accurate — and more damaging — claim is narrower: cheap fast-following plus open-weight releases commoditize every tier below the frontier, which is exactly what keeps the frontier labs on a treadmill they can’t step off.

The economics are stranger still. The industry is in the middle of an AI coding war where the leaders subsidize usage to buy share — think stacked “Max” accounts and unprofitable seats, Sam versus Elon as a spending contest. The optimistic frame is Jevons: make compute cheaper and usage explodes to more than fill the gap. The pessimistic frame is a price war where usage grows and margins collapse together. And here’s the operator’s punchline for SpaceX: the ~$26B AI line is commodity compute, rented to the two shops actually monetizing the high-quality AI dollar (coding), while SpaceX’s own coding franchise — Cursor and Grok — is still a rounding error. SpaceX is selling shovels to the gold miners. Even the Cursor deal reads less like buying a product and more like buying training data — a data play dressed as an acquisition.

The $26 Billion With No ARR

This is the bear’s sharpest instrument, and it deserves its own section.

SpaceX has signed capacity deals to lease AI infrastructure to Anthropic and Google — roughly $26 billion of run-rate from those two customers alone (Anthropic ~$15B/yr at ~$1.25B a month; Google ~$11B/yr at ~$920M a month). It’s an enormous number. It’s also the softest number in the story, because it fails three tests of revenue quality at once:

• Commodity. This is capacity sold by the GPU-hour — the two leases back-solve to roughly $8–12 per GPU-hour — priced against every hyperscaler on Earth. No pricing power, no switching cost worth the name.

• Concentrated. Not ten thousand customers. Two. If either blinks, a third to a half of the AI segment vanishes in a single quarter — the kind of concentration an audit committee flags before it ever reaches the multiple.

• Cancelable. After a short initial period, the Anthropic lease can be terminated by either side on 90 days’ notice, and Google’s carries similar near-term optionality. So “$26B” is contracted but not committed — a lease your tenant can break in a quarter.

And here’s the kicker that turns a footnote into the whole argument: your two biggest tenants are your competitors. Anthropic and Google both build frontier models; xAI builds frontier models. You’re renting compute to the exact people you’re racing — and those people are on a training treadmill that keeps them structurally cash-stressed. So in the one scenario where you’d most want the revenue to hold — a compute glut, a downturn, a funding squeeze at the labs — that’s precisely when a stressed competitor-tenant is most able, and most incentivized, to walk. The revenue is lowest-quality exactly when you’d need it most. You cannot capitalize that like ARR. There is no “annual recurring” in it. It’s real money today and a mirage tomorrow, and the valuation is quietly leaning on it as if it were durable.

How Wide Is the Disagreement? Thirteen Times.

If you want one picture that proves this is a narrative and not a valuation, it’s this — what the Street’s smartest shops model for SpaceX’s 2030 AI revenue, the single most important number in the thesis:

That is not a rounding difference. It’s a thirteen-fold spread on the number that decides whether the stock is cheap or delusional, and the entire gap reduces to one question: do the Anthropic and Google leases renew and scale (Goldman, Evercore), or roll off without renewal (Morningstar)? When the best analysts on the Street disagree by 13x on your most important line, what you own isn’t a valuation. It’s a bet on which story wins — and the counterparties, not you, hold the pen.

The Supply Schedule: The Only Part With a Date On It

Everything else in this story is a probability — will Starship fly, will AI margins hold, will the leases renew. The share-supply schedule is different. It’s the one fact in the thesis that comes with a calendar, and the market treats a contractual certainty like a tail risk.

Today the tradable float is under 5%. That thin float is why the stock can melt up and give it all back inside a month; thin supply cuts both ways. But the direction turns one-way as the lock-ups release, and it releases in steps — the early buckets lift float into the mid-teens, the six-month unlock pushes it toward ~40%, and it drifts higher from there. The cliff is the last one: Musk’s roughly 6.4 billion shares unlock about a year out, taking tradable float toward ~98%.

Rising supply meeting a stretched valuation isn’t a surprise you hedge against; it’s a schedule you can read off a filing. And here’s the counterintuitive twist worth sitting with: more float can increase short pressure, not relieve it. Borrow cost runs high on a sub-5% float; as shares free up, borrow gets cheaper, and cheaper borrow lets more shorts on. The supply cliff doesn’t just add sellers — it arms them.

Bull, Bear, and What Each Host Actually Thinks

Strip away the noise and the two cases are clean.

The bull: SpaceX owns an unmatched launch monopoly, a genuinely profitable telecom in Starlink, and free optionality on Starship, AI, and Mars — bought at the price of a premium the market keeps paying. When one company can be the toll operator on an entire frontier, you overpay and you don’t apologize.

The bear: the profitable parts don’t support the price, the AI revenue is cancelable, the frontier is hard to defend, and “optionality” is doing almost all the valuation work. Take out the Elon premium and the math turns ugly fast.

Between the two hosts, the split is a real disagreement, not a hedge.

Joseph Kim is the more bearish, and specifically on AI economics — distillation compressing the frontier, the coming migration to local models, an unprofitable coding war, and Grok’s data-provenance problems all leave him wanting a better price. His discipline is what’s proven: the launch monopoly and Starlink are underwritten; Starship and AI are faith.

Matthew Kanterman’s caution runs through structure and duration — price it like a call option, respect the fat right tail and the real chance the premium expires worthless, and mind the supply cliff. Neither hands you a target. Both hand you a framework, and they land in different places inside it.

Each side has a clean falsifier, and naming it is what separates analysis from narration.

The bull is wrong if a tenant walks at the first lock-up test, or the coding war never turns profitable.

The bear is wrong if those leases go longer-dated and non-cancelable — the moment they become committed take-or-pay, the $26B stops being a mirage and starts being bookable ARR, and the stock looks cheap.

Governance: Read the Related-Party Lines

Then there’s the structure — and the honest version isn’t merger gossip, it’s the related-party mechanics already in the filings. The xAI merger valued xAI at ~$250 billion in an all-stock deal — SpaceX buying the CEO’s other private company with SpaceX stock. The Cursor (Anysphere) acquisition ran ~$60 billion, all-stock, roughly 3.3% dilution. And the data-center real estate runs through

Valor sale-leasebacks — a related party whose founder, Antonio Gracias, sits on the board. Speculation that SpaceX and Tesla eventually merge isn’t idle either; it’s the logical endpoint of an empire that treats corporate boundaries as suggestions. For an investor, that’s the whole thing in miniature: you are not buying a business with clean edges. You are buying exposure to Elon’s capital allocation — much of it transacted in his own stock, with his own related parties.

How to Actually Bet On It

So how do you play it? It depends on who you are:

• Traders get a liquid, high-beta, headline-driven vehicle — respect the float, respect the squeezes, respect the supply calendar, and size accordingly.

• Long-term investors have to answer one question honestly: do you believe Starship works and the AI business becomes defensible? If yes, the price may look cheap in a decade. If no, you’re paying a trillion-dollar premium for a very good telecom.

• Builders and operators should watch the cost curve, not the ticker — cheaper launch and cheaper compute reshape what’s buildable regardless of what the stock does.

The Trillion-Dollar Question

Underneath all of it is a single idea: economic rent. The most profitable position in any economy is the toll operator — the one who takes a small cut from everyone doing everything. Own the road to orbit, own a meaningful layer of AI compute, and you collect that toll across two frontiers at once. That is the bull case in one sentence, and it’s why a trillion-dollar-plus price tag can be argued with a straight face. In a world of persistent inflation and genuine platform shifts, ten-trillion-dollar companies are no longer unthinkable.

But optionality is not a plan, and a premium is not a proof. Some of the wildest ideas — orbital data centers, Mars economies — sit outside any honest investable horizon; the physics may exist, but the economics don’t, and “it’ll happen faster than you think” has been wrong about every frontier from fusion to quantum for decades.

So the question isn’t “is SpaceX a good company?” It obviously is. The question is narrower and harder: are you buying a rocket company that might become an AI company — or an AI call option that happens to own the best rockets on Earth? Answer that, and you’ve answered whether the biggest IPO in history is the buy of the decade or its most expensive lesson.

Key Takeaways

• Frame it as a call option, not a company. A ~$250B base business plus a ~$1.5T premium for Elon-scale optionality — price both halves.

• The profitable parts don’t reach the price. Launch (~$4B) and Starlink-led connectivity (~$11.4B) are excellent, but launch + telecom alone are worth ~$250B, not $1.5 trillion.

• The valuation lives in AI — and don’t confuse the two AI numbers. ~$3.2B is recognized revenue; ~$26B is a forward run-rate on cancelable leases. The xAI/Colossus pivot closes the gap, and it’s the least proven, hardest-to-defend piece.

• The $26B is commodity, concentrated, and cancelable — and owed by your competitors. The Anthropic and Google leases are huge, back-solve to ~$8–12/GPU-hour, come from two customers, cancel on ~90 days’ notice, and both tenants build rival frontier models. Don’t capitalize it like recurring revenue.

• Thirteen-x disagreement is the tell. 2030 AI revenue: Goldman ~$322B, Evercore ~$331B, Morningstar ~$24B. That spread means you own a narrative, not a valuation.

• The supply schedule is the only dated fact. Float goes from under 5% toward ~98% as Musk’s ~6.4B shares unlock — and more float can mean more short pressure, not less.

• Starship is the swing factor. Full reusability, orbital refueling, and a reusable heat shield are unsolved. The bull owns every unlock; the bear only needs a few to stall.

• China, not Blue Origin, is the competitor that matters — because it doesn’t need to win, only to stop buying and take its own share.

• It’s a framework, not a price target. Decide what you believe about Starship and defensible AI, then size the position to match your conviction — and the float.

The disconnect between fundamentals and valuation tells you everything about what’s really broken at Ubisoft. Public markets aren’t pricing in a business downturn. They’re pricing in a complete loss of confidence in the company's leadership.

Speakers:

• Matthew Kanterman, Blue River Financial Group

• Joseph Kim, Lila Games

• Eric Kress, Deconstructor of Fun

• Brian Peganoff, Timber Advisors

The Efficiency Gap That Explains Everything

Matthew dropped a stat in our discussion that crystallizes Ubisoft’s problem better than any other: revenue per employee (we warned you about this 2.5 years ago).

Ubisoft generates approximately $123,000 in bookings per employee. EA generates over $500,000. Take-Two exceeds $400,000 (and in a GTA year, that number climbs even higher).

That’s not a gap. That’s a chasm. And it explains why a company generating $1.85 billion in annual bookings can trade at a market cap barely over $1 billion while EA is selling to Saudi investors for $55 billion.

The story gets worse when you dig into Ubisoft’s recent cost-cutting. From March 2023 to March 2025, they eliminated 3,000 employees and cut fixed expenses by €205 million. They’re planning another €100 million in cuts (roughly 1,500 more people) by March 2027. Despite all this surgery, they’re still projecting break-even operating profit.

The business isn’t generating returns. It’s just surviving.

The Tencent Deal: Lifeline or Exit Strategy?

In November, Tencent invested €1.16 billion (~$1.25 billion) to acquire a 26.32% stake in a new subsidiary, Vantage Studios. This carve-out contains Ubisoft’s crown jewels: Assassin’s Creed, Far Cry, and the Tom Clancy brands (including Rainbow Six).

Brian’s framing of this deal was blunt: “Your company is worth a billion dollars. You’re looking at this rich Chinese investor and saying, ‘You can have my whole company for a billion dollars.’ Instead, they say, ‘How about I just give you a billion dollars for 25% of your three biggest franchises?’ And they shake hands. This only ends one way.”

The deal terms tell the story:

• Ubisoft must retain a majority stake in Vantage for at least two years

• Tencent has a five-year lockup, while Ubisoft maintains the majority

• Roughly 25% of the cash went to paying down debt

This isn’t a turnaround investment. It’s a call option. Tencent gets exposure to franchises that have generated $9.5+ billion over the last decade, with minimal downside risk. If the Guillemot family continues to mismanage these IPs, Tencent can wait and potentially acquire the rest at distressed prices.

Matthew suggested an alternative endgame: “What’s more likely to me than Tencent buying it out is in two years they flip Vantage to private equity. They sell Vantage to private equity and leave Ubisoft shareholders holding the bag on everything else.”

How Did Europe’s Gaming Champion Implode?

Three structural failures destroyed Ubisoft’s position.

First: The Copy-Paste Design Philosophy

Starting in the 2010s, Ubisoft perfected open-world game design. The problem? They applied the same template to Assassin’s Creed, Far Cry, Watch Dogs, and Ghost Recon without meaningful iteration. What worked well for years eventually became a liability as players grew fatigued with the formula.

Assassin’s Creed Valhalla (2020) was actually the franchise’s best-selling entry. The RPG-style pivot in Odyssey and Valhalla worked commercially, even if longtime fans complained the games didn’t feel like “real” Assassin’s Creed anymore. But Ubisoft couldn’t sustain the momentum. And critically, they never built a third Assassin’s Creed studio to maintain an annual release cadence—something Matthew flagged as an inexplicable strategic failure.

Second: Death by a Thousand Pet Projects

Eric's list of misallocated capital is damning: The Crew, Starlink (Toys to Life, launched years after the category died), Rocksmith (which Eric acknowledged was "a great product" but "the juice wasn't worth the squeeze" for profitability), Haze, Avatar, the Quartz NFT platform, XDefiant, and Skull & Bones.

Skull & Bones deserves special mention. An 11-year development cycle. Estimates between $500 million and $1 billion in total investment. The project grew from a minigame in Assassin’s Creed Black Flag—boats were fun, so Ubisoft decided to spin off an entire game. Meanwhile, Xbox launched Sea of Thieves and captured the exact market Skull & Bones was chasing.

Star Wars Outlaws adds to the destruction. The game’s mechanics were solid, but design decisions alienated the target audience. It sold roughly 1 million units—disastrous for a AAA Star Wars title, given whatever minimum guarantee Ubisoft paid Disney.

Eric’s indictment: “EA, all the other publishers were focusing on three or four big franchises and doing a few risky bets. These guys were taking risky bets all over the place.”

Third: Management and Culture

This is where the conversation got uncomfortable.

Serge Hascoët, Ubisoft’s Chief Creative Officer and the creative force behind Assassin’s Creed, Ghost Recon, and Far Cry, resigned in 2020 amid sexual harassment scandals. Three executives ultimately received suspended sentences—Hascoët (18 months), former VP Editorial Thomas François (3 years), and former game director Guillaume Patrux (12 months). The culture Eric described was “endemic.”

But Hascoët’s departure created a different problem. Yves Guillemot, who Eric describes as “not a design person,” took over creative direction for the company’s biggest franchises. Family members—including Yves’s son Charlie, now co-CEO of Vantage Studios overseeing Assassin’s Creed, Far Cry, and Rainbow Six—have proliferated through leadership positions.

The departure of Yannis Mallat (Managing Director of Ubisoft’s Canadian studios) and Cécile Cornet (Global HR) in 2020 marked the end of objective management outside the family. Since then, every major decision has been made by the Guillemot family members and their loyalists.

Eric’s assessment: “This whole thing was set up so they could maintain the family. Yves has always wanted his family to inherit this company. And this is what this Tencent deal gave him—that security. But it’s definitely not good for the franchises, certainly not good for the shareholders.”

The France Problem

One structural challenge Ubisoft cannot solve: 25% of its workforce (roughly 4,000 people) is based in France, where labor laws make headcount reductions extraordinarily difficult.

Eric’s provocation: “If you actually shut down Paris, if you shut down all operations in France, you would lose almost no value to this company. They literally have no development and no management required to manage their biggest franchises in France.”

All of Ubisoft’s valuable IP development happens in Canada. The Tencent deal essentially creates a path where “Canada will be Ubisoft and France will just basically get shut down.”

The Only Bull Case

Is there any path to recovery?

There is likely great talent within Ubisoft studios. Eric emphasized that the development teams—particularly in Montreal—are capable of making great games. The Division team is excellent. The Assassin’s Creed team has delivered when given proper direction.

According to Eric, the problem isn’t the people making games. It’s the decisions being made above them.

Clair Obscur: Expedition 33, the critically acclaimed RPG from Sandfall Interactive, was led by a former Ubisoft producer who left the company. The talent likely exists. The question is whether it can express itself under the current leadership.

Rainbow Six Siege proved that Ubisoft could build and operate a genuine live service success. That template exists—they just never replicated it.

But our collective view was pessimistic. The company remains under the same management that destroyed over $15 billion in shareholder value. The Tencent deal provides runway, but it also reveals how limited outside confidence in a recovery truly is.

Brian summarized what public markets have already concluded: “This is not a mystery to anybody anymore. This company is using this as a slush fund for the family to operate and do a terrible job, and they don’t give a shit anymore.”

Key Takeaways

• Ubisoft’s revenue per employee ($123K) is 4x lower than EA’s ($500K+)—this efficiency gap explains the valuation collapse better than any single failure

• 70% of Ubisoft’s bookings come from back catalog titles—they’re living off past hits, not building new franchises

• The Tencent deal is a call option, not a rescue—€1.16B (~$1.25B) for 26% of the company’s best IPs is positioned as a put, not a bet on recovery

• All valuable IP development happens in Canada—the French operations contribute minimal value while employing 25% of the headcount

• Serge Hascoët's 2020 departure removed the creative brain—Yves and family members have made design decisions since, with catastrophic results

• The talent is still there—studios like Montreal can make great games under the right leadership; the problem sits at the executive level

What’s your take on Ubisoft’s future? Can the company recover under current management, or is the Tencent deal just the beginning of the end? Leave a comment below.

AppLovin is the apex predator in mobile right now. My business is proof that they’re not being prohibitively high in their pricing—because if they were, I wouldn’t be succeeding. But we do lack independence, and it does come across as though we are operating inside somebody else’s system.

That’s Josh Chandley, CEO of WildCard Games and one of the sharpest operators in mobile monetization, describing the uncomfortable reality of building games in AppLovin’s ecosystem. His portfolio generates millions in revenue through AppLovin’s platform—and he’s still nervous about what comes next.

The gaming industry’s most controversial company just crossed $250 billion in market cap. The stock is up 127% year-to-date. EBITDA margins hit 82% last quarter. And yet many executives and investors in the mobile and gaming industry ask the same question: Is this the beginning, or the end?

I assembled what may be the most qualified panel possible to answer that question: Chandley with his hands-on operational data, Matthew Kanterman with a financial analyst lens, and Brian Peganoff with an institutional investor perspective. What emerged wasn’t the typical bull-bear debate—it was a blueprint for understanding how dominance actually works in ad tech.

🎧 Listen on Spotify, Apple Podcasts, or Anchor

Speakers:

• Josh Chandley, President & CEO at WildCard Games

• Matthew Kanterman, Director of Research at Blue River Financial Group

• Brian Peganoff, Former TMT Investor, Founder Timber Advisors

• Joseph Kim, CEO at Lila Games

The Numbers Tell One Story. The Operators Tell Another.

AppLovin’s financials look like a typo. Revenue and EBITDA are up 72% through the first three quarters of 2025. The stock trades at 32x forward revenue and 39x forward EBITDA. At a PEG ratio of approximately 1, the valuation is technically justified by projected 2026 revenue growth of 35-40% and EBITDA growth of 40%.

“It’s been a loser’s bet basically for the last three years to bet against Adam,” Kanterman notes. “The valuation has re-rated. The question is what’s next.”

But here’s what the financials don’t capture: the structural lock-in that makes AppLovin’s margins possible in the first place. Chandley laid out the mechanics with uncomfortable specificity.

AppLovin owns MAX, the dominant ad mediation platform. They charge competing networks a 5% fee to bid on inventory—while exempting themselves. “They don’t have to be as good as Meta or Unity,” Chandley explains. “They just have to be 95% as good.” In machine learning-driven auctions where advantages compound at the margin, that’s an insurmountable head start.

The lock-in deepens through Axon, their demand-side platform. For ad-monetized games, it’s completely normal to have over half of your users coming from Axon. And here’s the key: you can only use Axon if you use MAX. Publishers who leave MAX lose access to Axon—and with it, roughly half their user acquisition pipeline.

“That’s why over the last couple of years we’ve seen them able to double their revenue publicly without actually really increasing their share of voice very much,” Chandley says. “Their take rate is just doing incredibly well.”

Translation: AppLovin isn’t growing by winning more auctions. They’re growing by extracting more value from the auctions they already win.

The E-Commerce Expansion: Where the Real Action Is

The bull case for AppLovin increasingly rests on its expansion into e-commerce advertising. Chandley’s data from his own portfolio is striking: at one point on iOS, all 10 of the top creatives in his games were AppLovin e-commerce ads. Around Black Friday, AppLovin passed Google Ads on Android for e-commerce—on Google’s home turf.

“Most importantly for their stock, that dominance—the share of voice, the number of impressions that AppLovin is winning as a percentage—is barely changing despite all of this new demand flowing in,” Chandley explains.

Think about what that means. E-commerce advertisers are flooding in, willing to pay premium prices. But AppLovin isn’t passing that value to publishers. The gap between what advertisers pay and what publishers receive is widening—and that gap is pure margin.

The structural advantages that made AppLovin dominant in gaming translate directly to e-commerce. Their rewarded video inventory is fundamentally different from Meta’s feed ads. “An ad on AppLovin’s rewarded video is a 30-second infomercial,” Chandley notes. “The attention is guaranteed.” That matters enormously for e-commerce conversion.

Meta and Google face three barriers to competing effectively in this space. First, iOS: AppLovin’s share of voice is 30% on Android but 55-60% on iOS. ATT gifted them that position, and five years later, Meta and Google still haven’t recovered. Second, creative relevance: 15-second thumb-stopping content optimized for social feeds doesn’t perform as well in 30-second captive-audience slots. Third, organizational DNA: Meta and Google built trillion-dollar businesses on first-party data within walled gardens. Their entire infrastructure—ML models, sales organizations, account management—struggles outside their owned-and-operated properties.

“Google and Meta are fighting distracted giants in a venue where those giants can’t really use their greatest strengths,” Chandley summarizes.

The Bear Case: Expectations Already Assume Victory

Brian Peganoff frames the bear case precisely: “It’s not like this is a broken company with some hidden structural flaw. The bear case comes down to the valuation already reflecting success.”

At a $250 billion market cap, the stock isn’t expensive given the stretched multiple. It’s expensive because earnings already assume a lot goes right. The risk is disappointment, not multiple compression.

Peganoff identifies five specific concerns. Growth durability—upside depends on self-serve adoption, Axon performance gains, and advertiser wallet share continuing to compound. If that flywheel slows even modestly, operating leverage flips from tailwind to limiter. Expansion optionality—e-commerce and connected TV are attractive but not yet scaled or transparent enough to underwrite as core drivers. Scale effects—the last two years benefited from simplification and low-hanging improvements that become harder to find. Competitive convergence—Google, Meta, Amazon, and Trade Desk don’t need to beat AppLovin; they just need to narrow the gap.

The SEC investigation adds a layer of uncertainty. The agency’s Cyber and Emerging Technologies unit is examining AppLovin’s data collection practices, which were triggered by a whistleblower complaint and amplified by short sellers (Muddy Waters, Fuzzy Panda, Culpert Research). The allegations center on fingerprinting and potentially fraudulent attribution practices.

The panel’s consensus: the risk of deplatforming is real but low. “The likelihood is probably 2-3%,” estimates one panelist. I think it’s higher—maybe 20-30%—but it's still not the most likely outcome. The more likely result is platform restrictions or fines that affect the business model without destroying it.

But there’s a nuance worth considering. “Anytime an ad tech platform shows this kind of performance, people are going to ask where that data access is coming from and could it get shut off,” Peganoff notes. “It’s the whole Cheetah Mobile conundrum.”

The Infrastructure Risk Nobody’s Discussing

Chandley raises what he considers the only significant negative risk: losing control of supply.

Right now, publishers stay loyal to MAX because they want access to Axon’s ad ROAS campaigns. But that loyalty has a price. If another platform could increase LTV enough to overcome the loss of Axon, publishers would leave. Or if Axon’s advantage shrinks enough that existing platforms could jump the hurdle, there would be a flight from MAX.

Both scenarios are happening simultaneously, Chandley argues. AppLovin’s take rates are extremely high—if they decreased from 50% to 30%, publishers would see a 40% increase in LTV, enabling much more aggressive scaling on Meta and Google. Meanwhile, MAX itself appears to be aging. “It has been largely underdeveloped. Axon 2 and the e-commerce opportunity have been front and center for them.”

The specifics get technical but matter enormously. Some networks are exploiting open auctions to manipulate bid prices. Unity opened up its LevelPlay ad quality tool for MAX, which seems helpful until you realize it gave Unity direct access to data flowing through AppLovin’s platform. Other parties are nibbling away at AppLovin’s data advantage through product offerings that fill gaps MAX has neglected.

“This quarter, WildCard has spent less on AppLovin than we expected,” Chandley reveals. “Some networks are starting to cross over. Competitors are improving—Unity, Moloco, and to a lesser extent Mintegral improved their performance dramatically in 2025.”

The structural question: Can AppLovin scale e-commerce without threatening their ad ROAS moat in gaming? Can a relatively small company by headcount (1,500 employees versus Unity’s 5,000) execute on Axon, e-commerce expansion, and MAX improvement simultaneously?

The Competitive Landscape: Three Arenas, Different Dynamics

Mobile Gaming & Mediation: Unity theoretically has advantages AppLovin lacks—70% engine market share, direct IAP data visibility, and the IronSource acquisition. In practice, execution has lagged. “I’ve noticed over the years that there has been an execution gap at Unity,” Chandley acknowledges. But he’s careful to credit the Unity Grow team specifically: “Vector has shown it’s really good. It’s been picture perfect. We’ve seen it more than double share this year.”

The structural opportunity for Unity remains tantalizing: if they can execute on passing back engine data through Unity 6.2, they’d have the same kind of first-party data advantage in IAP games that AppLovin has in ad-monetized games. But timeline risk is real—these data pipelines take longer to build and debug than anyone expects.

E-Commerce: The owned-and-operated networks (Meta, Google) have significant demand but face iOS-related challenges and creative relevance challenges. Moloco is expanding but lacks the mediation infrastructure that gives AppLovin its structural advantage. For now, AppLovin is running largely unopposed.

Connected TV: This is genuinely a wild card. Trade Desk dominates programmatic CTV but had execution issues last year as Amazon took share. AppLovin’s six times Trade Desk’s EBITDA on a little more than double the revenue—they have the resources to compete. But CTV presents different challenges: zero percent of commerce occurs on the TV screen, attribution is less clear, and the targeting advantage that works in mobile gaming may not translate.

“Connected TV is kind of a dumb surface,” Peganoff notes bluntly. “No transactions occur there. The personalization problem is fundamentally different.”

What Each Panelist Actually Thinks

Brian Peganoff (Institutional Investor Lens): “Directionally positive. Scale has reduced risk, not increased it. The company is simpler than it was two years ago, margins are real, execution has been consistent. You’re underwriting continuation, not a new strategy. But expectations are already high—upside has to come from earnings continuing to surprise, not from the market paying more for the same dollar of profit.”

Matthew Kanterman (Financial Analyst Lens): Largely agrees with Peganoff, but emphasizes macro risk. “AppLovin has a beta of three. A lot of that is negative downside skew. If something bad happens or there’s a massive liquidity drain from the market, AppLovin drawdowns have been violent and aggressive. We’re one tweet away from the president sending the market down 20%.”

Josh Chandley (Operator Lens): “AppLovin is an incredible business. Every person I know at that business is exceptional. They’ve taken huge margins and returned huge value for their customers at the same time. 2026 will start with a victory lap, and the e-commerce opportunity is going to look really good. But 2026 is also when the next chapter starts to emerge—when it becomes clear whether there’s a real competitor. What are Google and Meta going to do on iOS? Can Unity execute on engine data? The fog will start to lift.”

Joseph Kim (Mr. Handsome): I’m probably the most bearish person here, though even I think they roll in the short term—maybe to $500 billion market cap. My concerns center on growth deceleration in e-commerce as Meta and Google eventually respond, and I don’t think the deplatforming risk is quite as negligible as others do. But the structural moat is real, and in the short term, momentum wins.

The Strategic Implications

For Game Studios: You’re operating inside someone else’s system. That’s not necessarily bad—WildCard is proof you can succeed within AppLovin’s ecosystem—but diversification matters. Test Unity’s Vector for IAP campaigns. Maintain relationships with multiple ad networks. Watch Meta and Google’s iOS strategies closely; if they crack probabilistic attribution at scale, the dynamics shift.

For Investors: This is a quality compounder, not a momentum trade. The multiple expansion story has played out. From here, upside requires earnings surprises, which in turn require e-commerce expansion and self-serve adoption to exceed already-high expectations. If the market de-rates broadly, AppLovin will come with it—but likely from a position of strength.

For Competitors: The window is narrowing but not closed. Unity has the data assets to compete if execution improves. Meta and Google have the demand if they can solve the iOS problem and the creative relevancy challenges. But every quarter of inaction is another cohort of games locked into MAX, another round of advertisers trained on AppLovin’s infrastructure.

The Quarter-Trillion Dollar Question

Here’s what makes AppLovin genuinely fascinating: the business is simultaneously the most dominant ad tech platform in gaming, the most controversial stock in the sector, and the most misunderstood by traditional investors who don’t grasp the technical mechanics of how their moat actually works.

The bull case is that the flywheel keeps compounding—more publishers on MAX means better data for Axon, which means better performance for advertisers, which means more demand, which means higher take rates, which means more publisher lock-in. E-commerce expansion is gravy on top.

The bear case is that expectations already assume the flywheel works perfectly. Any slowdown in growth, any competitive response from Meta or Google, any regulatory action that affects their data practices, and the multiple compresses faster than earnings can grow.

Both cases can be true. AppLovin can be a great business and a risky stock at current valuations. The dominance can be real, and the runway can be shorter than investors expect.

Chandley puts it most precisely: “I find myself stating the bear case a lot more than I probably should, just because it’s so under-talked about. But like every person I know at that business is exceptional. They’ve executed to perfection so far—at least in the short to intermediate term window.”

For the industry, the implications extend beyond one company’s stock price. AppLovin’s success demonstrates that owning the infrastructure matters more than owning the inventory. That vertical integration from mediation to demand-side to attribution creates compounding advantages that traditional ad networks can’t match. The mobile attention economy is consolidating into fewer, more powerful hands.

Whether that’s good or bad depends on where you sit. But it’s definitely happening.

Key Takeaways

• AppLovin’s moat isn’t performance—it’s infrastructure. The MAX/Axon lock-in means they don’t have to be better than competitors; they need to be 95% as good.

• E-commerce expansion is working, but not being passed to publishers. Share of voice is flat while revenue doubles—the gap is pure margin extraction.

• The bear case is about expectations, not fundamentals. At $250B market cap, the stock already prices in continued dominance.

• Deplatforming risk is real but probably low. The SEC investigation matters, but platform restrictions seem more likely than complete removal.

• 2026 is when competitive clarity emerges. Unity’s engine data play, Meta and Google’s iOS response, and new entrants will either materialize as threats or fail to launch.

• For operators: diversification matters. Success within AppLovin’s ecosystem is possible, but dependence on any single platform creates risk.

What’s your read on AppLovin’s next chapter? Reply with your thoughts—I read every response.

“If I got an unsolicited offer from a sovereign entity that has effectively unlimited money, would I push for more? I think so.”

That’s Matthew Kanterman, CFA, gaming industry analyst, raising the question almost no one else is asking about EA’s $55 billion sale to Saudi Arabia’s Public Investment Fund: Why did EA accept this price, right now?

The gaming industry has just witnessed its largest-ever LBO, with nearly everyone focusing on the obvious story—Saudi Arabia’s gaming ambitions, Vision 2030, and strategic synergies. But the more revealing insights come from flipping the question: What made Andrew Wilson and EA’s board choose to exit public markets at this specific moment, and why does calling this a “typical LBO” fundamentally misunderstand what’s actually happening?

I sat down with two people who know precisely how these deals work: Chris Petrovic, the architect behind Zynga’s massively successful acquisition strategy (now Chairman and CBO at FunPlus), and Matthew Kanterman, CFA, who specializes in dissecting gaming M&A and exposed an accounting myth that’s been distorting EA’s operational story for years. I totally got this one wrong as well!

What emerged wasn’t just an analysis of one deal—it’s a window into how sovereign wealth is rewriting the rules of gaming M&A, why traditional efficiency metrics have been measuring EA all wrong, and what happens when “patient capital” meets an industry built on quarterly earnings pressure.

The Real Question: Why Did EA Sell Now?

Most coverage obsesses over Saudi’s rationale. That’s the easy part—they’ve publicly stated gaming is central to Vision 2030, they want to own pieces of the attention economy, and EA’s sports portfolio aligns perfectly with their massive investments in live entertainment (WWE, UFC, global football).

But Petrovic, who’s negotiated enough mega-deals to know what happens behind closed doors, immediately zeroes in on the seller’s perspective:

“I think less has been discussed around it from the seller’s perspective, which is putting yourself in Andrew and the board’s shoes. Why would they choose to take themselves off the public markets where they have a great asset and a great currency against which they can do things like raise debt and continue to have a tool for compensating employees?”

The signals pointing to pressure:

Portfolio concentration risk: Over 50% of EA’s revenue flows from just four franchises. Sports remain dominant, but what comes after Battlefield launches? Where are the next major catalysts?

Chinese competition intensifies: With developers like Tencent and NetEase dominating shooters, can Apex Legends hold its position? The competitive dynamics are shifting dramatically.

Public market scrutiny: Perhaps EA’s leadership saw pending challenges they didn’t want to navigate under quarterly earnings pressure and analyst scrutiny.

Petrovic lays out the possibilities: “Perhaps there were some palatable headwinds they were noticing in their business. Perhaps there were some pending hostile takeovers that may have been in process. Maybe they were going to head off an eventual approach from other strategics that have always been rumored. Maybe they just didn’t want to deal with the scrutiny of being able to take riskier bets and think longer term.”

Coming Soon: Within 45 days of the announcement, EA must file a proxy statement detailing any conversations with other potential buyers. If Take-Two, Disney, or others were circling, we’ll know soon whether this was EA’s preferred “white knight” scenario to avoid a more hostile alternative.

The valuation question persists: At 17-18x forward EBITDA, EA sold at a discount to Activision’s 20x multiple when Microsoft acquired them. Different market conditions, yes—but Kanterman’s question lingers: what was happening inside EA that made this deal, at this price, the right answer?

🎧 Listen on Spotify, Apple Podcasts, or Anchor

Speakers:

• Matthew Kanterman. Director of Research at Blue River Financial Group.

• Joseph Kim. CEO at Lila Games.

• Chris Petrovic. Board Chairman and CBO at FunPlus.

The Accounting Myth That Changes the Efficiency Story

Here’s what many folks got completely wrong (including me in my last MAG newsletter) about—and why the “operational bloat” narrative needs to die.

The conventional wisdom: At $128K free cash flow per employee versus Activision’s $270K or Nintendo’s $390K, EA appears inefficient and overstaffed. Fire up the cost-cutting playbook, right?

The reality: “Prepare to be bored with accounting dorkiness,” Kanterman warns, before dropping the truth bomb that reframes everything:

“EA has been notoriously the most conservative of all the public companies. They just expense everything. So all the expenditures that go into making a game is just expense in the current period. Others like Take-Two, Activision, they’ve chosen to capitalize some of that stuff. So it doesn’t hit the P&L, it goes below free cash flow actually.”

Why this matters for everyone analyzing the deal:

• Different accounting rules create incomparable metrics: US GAAP vs. international IFRS standards handle software development costs differently

• Capitalization vs. expensing affects both timing and location: Where costs appear on financial statements varies by company

• Hardware revenue skews the numbers: Comparing Nintendo (which sells Switch) to pure software publishers is apples-to-oranges

• On a bookings basis—the comparable metric—EA performs competitively: The efficiency gap isn’t what surface numbers suggest

Kanterman continues: “When you’re comparing across geographies and even within the U.S. with Activision, Take-Two and EA, they all account for it differently. On a bookings basis it’s much more comparable and EA does compare pretty strongly.”

Translation: The case for aggressive cost-cutting isn’t as obvious as the per-employee metrics suggest. EA’s conservative accounting makes them look less efficient than they actually operate.

Why This Isn’t a Traditional LBO (And Why That Matters More Than You Think)

Call it an LBO if you must, but Petrovic is blunt about what this deal actually represents:

“I have a little bit of a different take on this in the sense that I don’t know that operational efficiency is going to be a front and center agenda item anywhere in the near to medium term.”

Wait—what? A $20 billion debt load and no focus on operational efficiency? That violates every private equity playbook rule. Which is exactly Petrovic’s point.

Silver Lake’s Real Role

“I wonder why they needed JP Morgan to float a loan when PIF could have set up a loan instrument as well. They have plenty of money to fund the whole thing. And my sense is that if anything gets squirrely around repayment, [PIF] will step in and just bridge the gap to protect their investment.”

The structure reveals the strategy:

• Silver Lake and Affinity Partners likely hold high single digits to low double-digit equity stakes each

• That’s perhaps 20-30% of equity, representing only ~10% of total enterprise value

• They came in for optics and expertise, not control

“Silver Lake came in for optics,” Petrovic argues. “This is not a typical LBO where they have a majority position they need to protect.”

No Proctology Exam Required

Forget the stereotypical PE playbook of day-one cost purges:

Traditional LBO playbook:

• Immediate 10-15% headcount reductions

• Aggressive portfolio rationalization within 90 days

• Quarterly debt coverage anxiety

• 5-7 year exit timeline driving every decision

The Saudi PIF reality:

• 10+ year investment horizon minimum

• No public earnings reports or quarterly scrutiny

• Benevolent benefactor willing to backstop debt if needed

• Investment in growth is prioritized over margin optimization

• Privacy to make long-term bets without explaining them to analysts

“You don’t need to worry about publicly stating your financials anymore,” Petrovic notes. “They’re not going to be tapping their wristwatches saying ‘when are we going to see the next 10% cuts?’ They want a plan for growth, they’re going to be willing to invest in it.”

The debt coverage reality: At roughly $2 billion in adjusted annual free cash flow (factoring in Battlefield’s contribution), EA covers the estimated $1.6 billion annual payment on $20 billion at 8% interest. And if concerns arise? Kanterman points out that PIF also owns Scopely—they could theoretically bundle cash flows or simply inject more equity.

“There’s a world where they could put part or all of Scopely’s cash flow in the box for the creditors,” Kanterman explains. “If the Saudis were concerned about debt coverage, they have a lot of levers to pull.”

The Mobile Question: Integration or Independence?

EA derives 15-18% of revenue from mobile (primarily FC Mobile and Sims Mobile). PIF owns Scopely, one of mobile’s most sophisticated operators known for aggressive UA strategies. The obvious question: massive synergies incoming?

The less obvious answer: probably not the way most people expect.

Why Full Integration Is Unlikely

Structural separation: EA and Scopely remain distinct entities under common ownership—not a merged company. Any collaboration requires independent business justification from both sides.

“Unlike Zynga and EA, this is going to have to be arm’s length dealings,” Petrovic explains. “These are two related entities that still operate somewhat independently because they’re not under common ownership in the on-paper sense.”

Anything Scopely does—whether taking over publishing, licensing IP, co-development—requires their own business case. Same for EA. They may have a pole position in negotiations, but this isn’t a top-down “you will collaborate” mandate.

The Best Practices Opportunity

Rather than full integration, expect knowledge transfer:

Where Scopely excels:

• Sophisticated UA optimization and scaling strategies

• Monetization framework development

• Live operations and player engagement

• Using global resources efficiently

Where EA mobile has struggled: According to industry sources, EA’s mobile UA function has been basic and not aggressive enough—the opposite of Scopely’s reputation.

“If they can drive efficiencies and best practices in UA to scale [FC Mobile and Sims Mobile], there’s huge synergies and that falls down pretty quickly,” Kanterman observes.

But he’s skeptical about the smaller titles: “You take a $5 million mobile game and make it $10 million, you’re probably losing money adding $5 million in revenue. You’re probably losing EBITDA to get that incremental revenue. So it’s not worth it.”

The opportunity: Optimize the few large existing mobile titles (FC Mobile, Sims Mobile) through Scopely’s proven frameworks. Don’t waste energy rescuing small struggling games.

The Take-Two Cautionary Tale

Nearly four years after Take-Two acquired Zynga for $12.7 billion, not a single mobile title based on Take-Two’s massive IP library (GTA, Red Dead, Bioshock, Borderlands) has launched through Zynga.

“This deal has been over four years old and not one hint of any Take-Two mobile IP coming to bear through Zynga,” Petrovic notes. “So you can maybe expect the same here, especially because there’s actually no public market expectation of that synergy having to happen within a certain period of time.”

Don’t hold your breath for rapid EA-Scopely IP co-development.

The Real Growth Drivers: Sports, Asia, and Transmedia

Sports: The Strategic Core

The synergies between EA FC (formerly FIFA) and Saudi’s sports investments practically write themselves:

PIF’s sports portfolio includes:

• Ownership stakes in TKO (WWE/UFC)

• Major investments in global football/soccer

• Saudi Pro League transformation ambitions

• Pursuit of the 2034 World Cup hosting

The transmedia vision: “I think it’d be very interesting if you start thinking about a world where you’re interacting with live events inside of FC, inside of the core video game, playing along with it and rethinking what it means to watch a soccer game,” Kanterman suggests.

“There’s a vision there that makes a lot of sense that can really make EA FC... not just the marquee video game for football soccer, but the marquee entertainment hub for football soccer.”

This could include:

• Live event integration with real matches

• Streaming rights innovation

• Interactive viewing experiences

• Blurring lines between gaming and sports consumption

Sports isn’t just EA’s most stable business—it’s the strategic centerpiece of the entire Saudi entertainment vision.

Asia: The China Opportunity (and Necessity)

EA has consistently underperformed in Asia relative to market potential. Meanwhile, Chinese developers now dominate certain categories globally—not just in China.

The competitive reality: “Enough writing is on the wall for Western developers to acknowledge that they just don’t have the muscle to develop as commercially effective, scalable games in certain categories as China,” Petrovic argues.

With Affinity Partners (Asia/China specialists) in the consortium and Saudi’s global ambitions, expect M&A targeting Chinese development capabilities:

Potential targets:

• Century Games (proven Roblox operator—Kanterman notes potential for “Sims for the next generation” on Roblox)

• Studios focused on using Chinese development talent for global markets like MiHoYo

• Proven operators who can either create global hits or level up EA’s existing studios… hmm, again like MiHoYo

“I wouldn’t be surprised if some combination of Scopely, EA, and their benefactors penetrate the China market with some kind of M&A to bring those capabilities under the banner,” Petrovic predicts.

The dual opportunity: Use Chinese development expertise for both cost efficiency (AAA budgets are escalating unsustainably) and competitive quality (Chinese shooters are beating Western ones).

What Could Go Wrong: The Execution Risk Is Real

Five years from now, this could be a strategic masterpiece or a cautionary tale. The risks aren’t trivial.

The Franchise Concentration Problem

With 50%+ revenue from four franchises, any major stumble cascades:

• Battlefield’s reception matters enormously

• Apex Legends faces fierce competition from Chinese shooters

• AAA development challenges (Dragon Age struggles) haven’t disappeared

• What comes after the current roadmap?

The Studio Rationalization Question

EA’s famously siloed structure—Vancouver (FC), Florida (Madden), Maxis (Sims), BioWare—may eventually face pressure.

Kanterman is direct: “Do I think the day this deal closes they’re going to shut down Studio X and Studio Y? No. But I do think they’re going to give these studios a chance. And I wouldn’t quite call it a fiefdom, but these are kind of their own entities. I do think there is going to be a period of ‘prove it or what do we do with this?’”

Studios that fail to align with Saudi Arabia’s broader vision (sports, transmedia, global entertainment) may face rationalization. BioWare, which has struggled with recent releases, represents this risk most acutely.

But Kanterman emphasizes: “Do I think it’ll happen on day one or day 60, day 90? No, I think it’s going to be a much longer process.”

The Financial Tightrope

Even with patient capital, the fundamentals matter. At $2 billion annual free cash flow covering $1.6 billion debt payments, there’s limited cushion without growth or efficiency gains.

“Obviously they’re astute investors and they’re not just going to keep funding something in perpetuity that’s going to bleed money,” Petrovic cautions. “There is a point at which time I’m sure that they’ll run out of patience. But I think that patience timeline is a lot longer than it would be if it was a typical private equity timeframe.”

Industry Implications: Who Controls Gaming’s Future?

EA’s privatization accelerates a concerning trend for the gaming industry’s public market presence.

The Shrinking Public Market

After this deal closes, Take-Two becomes the only remaining independent major publisher at scale in U.S. public markets.

The ripple effects:

For private companies:

• Fewer public comparables for valuation benchmarking

• Reduced strategic acquisition exit opportunities

• Less institutional capital interest in gaming startups

For the industry:

• Decreased investor visibility and understanding

• Less scrutiny of business practices (good and bad)

• Concentration of ownership among sovereign wealth funds and tech giants

“When you think about just what that means for investor interest at a high level in the sector, it’s not a positive,” Kanterman argues. “Having fewer large public players reduces the exit opportunities for strategic acquirers.”

The Geopolitical Question

Between Scopely, Niantic (Pokémon Go), and now EA, Saudi Arabia will control roughly 10% of the global gaming market. Add Chinese company dominance, and a question emerges:

“Who do you want owning this attention economy—the time and money spent in gaming?” Kanterman asks. “That’s an important question everyone needs to think about.”

American and European independent studios are shrinking, while sovereign wealth and Chinese conglomerates are expanding. The concentration of gaming ownership into non-Western hands deserves more discussion than it’s getting.

The Optimistic Counter-Narrative

Petrovic offers a different lens: “The more large scale companies that go private, in theory, the more that there is opportunities for them to lean into innovation and long term thinking.”

He sees cyclical opportunity: “We are in a natural cycle in our industry that perhaps is leading to contractions, consolidation. We could very well be on our way to the next upcycle in gaming once we’ve come out of this new innovation phase driven by privatization, enabled by technologies like AI, and driven by the ongoing size of gaming within entertainment.”

Next wave candidates: Discord (IPO expected), Roblox (growing), Epic Games (perpetually rumored), and new entrants could replenish the public gaming ecosystem within 3-5 years.

“I have no doubts that we’ll come out of this stronger,” Petrovic concludes. “We’re just going through growing pains and filling out this teenage body of ours.”

The 5-Year Outlook: Success on Different Terms

Here’s the fundamental insight that changes how to evaluate this deal:

Traditional metrics might be irrelevant.

“At the end of the day, it almost doesn’t matter how it turns out,” Petrovic argues. “EA is just a cog in the larger wheel. Even if it doesn’t [hit financial targets], it really won’t be called a failure because it’s feeding so many other things and upstream aspirations.”

Measuring Success Differently

Traditional view: Revenue growth, margin expansion, debt coverage, franchise health, return on investment

Strategic view:

• Contribution to Saudi Arabia’s entertainment and sports dominance

• Success in securing the 2034 World Cup and major sports events

• Development of Saudi Arabia as a global entertainment destination

• Control of attention economy touchpoints across 2+ billion players

• Reputation transformation on the global stage

“These are things at levels we’ve never seen before in terms of big picture,” Petrovic notes. “Us focusing on EA’s billion swing here or there is going to become so inconsequential to the larger picture that it really won’t matter from that perspective.”

Kanterman’s pragmatic view: “It also depends on how you measure success here. There’s the financial angle where like does $8 billion of revenue become $7 or $10? Obviously if it shrinks financially, they’re losing. But that doesn’t necessarily mean that they’ve lost.”

If FC integrates deeply with live football events, if EA helps secure the World Cup, if Saudi Pro League becomes a top-10 global league—the deal succeeds even if EA’s standalone financials plateau or decline modestly.

Key Takeaways

Rethink the efficiency narrative: EA’s conservative accounting makes direct peer comparisons misleading. The operational bloat thesis isn’t supported by comparable bookings-based metrics.

This isn’t about short-term cost-cutting: Expect long-term investment in growth rather than the typical LBO playbook. Silver Lake’s involvement appears primarily optical. Patient capital changes everything.

Mobile synergies will be limited: Expect best practices sharing between EA and Scopely for major titles (FC Mobile, Sims Mobile), but not the aggressive integration many anticipate. Arm’s-length dealings will likely prevail.

Sports is the strategic core: The real opportunity lies in making EA FC the central entertainment hub for global football, integrated with Saudi’s massive sports investments and transmedia vision.

Watch for China M&A: With Affinity Partners involved and Chinese developers dominating key categories, expect acquisitions targeting development capabilities for both quality and cost efficiency.

Studio rationalization will come—slowly: Entities like BioWare that can’t align with the broader Saudi vision face long-term risk, but not the typical day-90 purge of traditional PE deals.

Industry concentration accelerates: Take-Two becomes the lone major independent US publisher. The implications for startup exits, valuations, and who controls gaming’s attention economy deserve serious consideration.

Measure success differently: EA’s financial performance might matter less than its strategic contribution to Saudi Arabia’s broader entertainment and geopolitical goals. This is a 10+ year play, not a 5-year flip.

The EA acquisition isn’t just about one company changing hands. It’s about a fundamental shift in who controls gaming’s attention economy, how much patience capital will have for AAA development’s escalating costs, and whether privatization enables the bold innovation bets that public market constraints have suppressed.

The smart money isn’t asking whether EA will grow 10% or shrink 10%. They’re asking what happens when sovereign wealth deploys patient capital at unprecedented scale in gaming, and whether the traditional playbook for measuring success still applies.

We’re witnessing gaming’s first truly patient capital experiment at mega-scale. The rules have changed. We just don’t know yet if that’s good or bad.

About the Experts:

Matthew Kanterman, CFA is a gaming industry analyst specializing in M&A, financial analysis, and market strategy. LinkedIn

Chris Petrovic is currently Chairman and Chief Business Officer at FunPlus, and previously served as President of Publishing at Zynga, where he led the company’s transformative acquisition strategy. LinkedIn

What’s your take on the EA acquisition? Hit reply with your thoughts—I read every response.

What You'll Discover:

• Why Unity's pricing model gives them a hidden advantage over Unreal in mobile gaming (hint: it's about UA economics)

• The "MAX playbook" that could transform Unity from a struggling engine company into an ad powerhouse

• How AppLovin's blind spot in IAP data creates Unity's biggest opportunity—if they're brave enough to take it

Do not miss this episode; check it out right now! 👇👇👇

Speakers:

• Josh Chandley. Co-founder and COO at WildCard Games.

• Matthew Kanterman. Director of Research at Blue River Financial Group.

• Joseph Kim. CEO at Lila Games.

📈 The $81 Billion Question: Can Unity Break AppLovin's Stranglehold on Mobile Gaming?

Here's a statistic that should keep Unity executives up at night: AppLovin's ad business generates an 81% EBITDA margin. That's not a typo. For every dollar of revenue AppLovin generates from ads, it keeps 81 cents as profit before taxes. Meanwhile, Unity—sitting on a potential goldmine of engine data from 70-80% of mobile games—has yet to fully leverage this asset for competitive advantage.

The gaming industry is witnessing a fascinating David vs. Goliath story, except David seems afraid to use his slingshot. We discuss Unity's biggest opportunity—and its most puzzling hesitation.

Executive Summary

• Create's fundamentals appear sound: After stripping away non-strategic assets, Create's core revenue grew 9% in Q1 2025, suggesting the engine business has stabilized post-runtime fee crisis

• Grow shows resilience: Despite AppLovin's dominance, Grow revenue increased 2% in Q1, with Vector demonstrating 15-20% performance uplift for IAP campaigns

• The real opportunity lies in data integration: Unity could transform its 70-80% mobile engine market share into a competitive advantage against AppLovin's monopolistic grip

• Studios want competition: Game developers are "deathly afraid" of AppLovin's market dominance and actively want Unity to succeed as a counterbalance

The Hidden Growth Story Behind the Headlines

While Unity's headline numbers paint a picture of decline—revenue down 17% to $1.8 billion in 2024—the real story emerges when you peel back the layers. Create's core revenue grew 9% in Q1 2025, while Grow increased 2%, suggesting both divisions are finding their footing after a tumultuous period. The company has been aggressively shedding unprofitable ventures, such as Weta Digital, and focusing instead on what actually generates revenue.

The financial turnaround is notable: They generated 286 million of free cash flow in 2024, which is up from 179 million the year before in 2023. For a company that many wrote off after the runtime fee debacle, this represents a significant operational improvement under new leadership.

The Create Paradox: Why Unity's Engine Business Is Both a Weakness and a Secret Weapon

Unity's Create division faces an existential challenge. As Josh Chandley provocatively stated: "Unity is not an engine company. In my mind, Unity is an ad network at this point." With two-thirds of revenue coming from Grow (ads) and likely an even higher percentage of profits, the engine business increasingly looks like a legacy product.

Yet this apparent weakness could become Unity's greatest strategic asset. The comparison with Epic's Unreal Engine pricing model is instructive—Unity's subscription model fundamentally limits revenue scaling, while Epic's commission-based approach grows with developer success. But here's the twist: "On mobile margins are tight, and it is...largely driven by performance marketing. And if Your LTV is 10 bucks and your competition's LTV is 10 bucks, and Unity is taking 2 cents from them, but Unreal is taking a dollar from you, who's going to bid more on UA?"

This pricing advantage creates a powerful moat in mobile gaming, where every penny counts in the user acquisition arms race.

The MAX Playbook: Unity's Untapped Opportunity

Perhaps the most intriguing strategic option discussed was Unity following AppLovin's MAX playbook. As Chandley explained, "MAX has given them omnipotence and incredibly powerful control" because AppLovin essentially pays developers to use MAX through the value of the data collected.

The parallel for Unity is compelling: "If the engine can accelerate Grow in the same way, for instance, MAX accelerated Applovin UA... MAX costs developers negative money. Applovin pays you to use it because the data that they get is so valuable."

Imagine if Unity made a similar play—offering the engine for free or even at a negative cost in exchange for data access. As Matthew Kanterman noted: "If Grow triples...if they're super successful, everything works and Grow as a 5 billion run rate business, they don't need to be charging for the engine anymore."

This isn't just theoretical. Unity has all the pieces:

• 70-80% market share in mobile game engines

• Direct visibility into player behavior and monetization

• An ads business hungry for better data

The question isn't whether they could—it's whether they will risk it to get there.

The AppLovin Empire: Understanding the Monopoly

To understand Unity's opportunity, you must first comprehend AppLovin's dominance. The numbers are staggering:

• 80% market share in mobile ad mediation (auctions)

• 81% EBITDA margins on their ad business

• 5% tax on competitors—Unity literally pays AppLovin for the right to bid on inventory

"AppLovin's first-party data is much higher quality than what Unity receives back from the auction...Applovin gets to know those things, and Unity doesn't. That is an unfair data advantage." The data disparity is particularly acute. While AppLovin knows whether an ad impression was a rewarded video or a banner ad (crucial for user valuation), Unity receives this information through a convoluted chain that often breaks or omits critical details.

The MAX Factor: How AppLovin Turned Mediation Into a Money Printer

AppLovin's MAX platform represents a masterclass in platform economics. As Chandley explained, "Applovin pays you to use it because the data that they get is so valuable." They've created a virtuous cycle where:

1. Free mediation platform attracts publishers

2. Publisher adoption generates superior data

3. Better data improves ad targeting

4. Superior performance justifies premium pricing

5. Market dominance allows them to set rules and extract fees

For ad-monetized games, the lock-in is nearly complete: "They tell you that you are not allowed to run ad UA campaigns unless you use MAX because that's how the technology works."

Unity's Blind Spot Advantage: The IAP Opportunity

While AppLovin dominates in-app advertising (IAA), they have a critical vulnerability: "For every dollar of ad monetization that happens in mobile gaming, there's probably 3 to 4 of IAP." AppLovin only sees IAP revenue when they caused the install, leaving a massive data blind spot.

This is where Unity's engine dominance becomes a strategic gold mine. With integration, Unity could theoretically see:

• Every purchase made in 70-80% of mobile games

• Player behavior patterns across the entire lifecycle

• Real-time monetization data without attribution delays

The potential impact? Chandley painted a compelling picture: "Imagine if Unity had the advantage for IAP or Applovin has for IAA. That's the upside."

Vector's Promise: Early Signs of Life

Unity's new Vector ad engine shows encouraging early results. "I've heard numerous first-hand accounts...of IAP campaigns and people running IAP campaigns where they've seen 15 to 20% uplift." While this pales compared to AppLovin's 10x advantage on MAX, it's significantly better than many expected.

The contrast with AppLovin's Axon 2.0 rollout is striking. Where AppLovin initially "tanked CPMs" and directed clients to use Unity while they fixed issues, Vector launched with immediate performance improvements. For a company with "a history of execution problems," this represents a meaningful shift.

Strategic Implications: The Path Forward

For Unity Leadership

We strongly believe Unity needs to take a big risk: stop playing defense. "Unity probably underestimates how deathly afraid some game studios are of Applovin." The industry wants—needs—a viable alternative to AppLovin's monopoly.

Three critical decisions loom:

1. Data Integration: The technical capability exists. Unity has had an ads business since 2016-2017. The question isn't "can they?" but "will they?"

2. Pricing Strategy: Follow the MAX playbook—consider making the engine free or negative-cost (via rebates) to maximize data collection. As Kanterman suggested, "If grow as a 5 billion run rate business, they don't need to be charging for the engine anymore"

3. Cultural Transformation: Can leadership dramatically improve Unity’s historical legacy of failed execution? Can the culture change from operating like it's in maintenance mode rather than fighting for survival?

For Game Studios

The industry stands at an inflection point. Studios must decide whether to:

• Accept AppLovin's monopoly and optimize within those constraints

• Actively support Unity's challenger position through adoption and data sharing

• Explore emerging alternatives before the market completely consolidates

Risk mitigation strategies:

• Maintain relationships with multiple ad networks

• Test Unity's Vector for IAP campaigns—early adopters may gain advantages

• Consider the long-term implications of single-vendor dependence

For Investors

Unity presents a complex investment thesis. The stock has already rallied 46% over the past 12 months, and at 26x EBITDA, "There's less room for error at this point."

Key factors to monitor:

• Vector adoption rates and performance metrics

• Any announcements regarding engine-ads data integration

• Market share shifts in both mediation and UA spend

• Management's willingness to make bold strategic moves

The Leadership Question That Changes Everything

Ultimately, Unity's fate may rest on a single factor: leadership.

“Can Matthew Bromberg, can he drive performance in the business?”

The technical pieces exist. The market opportunity is massive. Studios want competition. What's missing is the willingness to stop apologizing for past mistakes and start acting like the platform powerhouse Unity could become.

Three questions for the industry to ponder:

1. If Unity made its engine free tomorrow in exchange for full data access, would developers accept the trade-off?

2. How long can AppLovin maintain 81% margins before regulators or competitors force change?

3. What happens to mobile gaming if Unity fails to provide meaningful competition?

The mobile gaming industry is experiencing its most significant platform battle since the introduction of iOS 14.5 privacy changes. Unity has the tools to compete—70-80% engine market share, improving ad technology, and an industry desperate for alternatives. Whether they'll use them remains the $81 billion question.

The clock is ticking. Every day Unity hesitates, AppLovin's data advantage compounds. Every quarter of indecision is another cohort of games locked into MAX. The industry is watching, waiting, and hoping that gaming's underdog finally decides to fight.

Because in the end, monopolies aren't broken by better technology alone. They're broken by companies brave enough to use it.

Speakers:

• Joseph Kim. CEO at Lila Games.

• Brian Peganoff. Founder at Timber Advisors.

• Matthew Kanterman. Director of Research, Blue River Financial Group.

🎮 Gaming Industry 2024 Recap and 2025 Predictions: Key Trends Shaping the Future

2024 Year in Review: Key Industry Developments

1. Gaming Recession Impact

• Layoffs reached 14,600 in 2024, up 40% from 2023's 10,000

• Early 2024: Broad cost-reduction measures across companies

• Later 2024: Shift to more targeted, project-specific cuts

• Industry focus moved toward operational efficiency

• Many companies adopted "survival mode" mentality through 2025-2026

2. Live Service Dominance

Steam's year-end data revealed striking engagement patterns:

• Only 15% of players engaged with 2024 releases

• 47% played games from previous 1-7 years

• 37% chose titles over 8 years old

Successful live service games maintained audiences through:

• Sophisticated live operations systems

• Deep social integration features

• High player investment in existing content

• Regular content updates and events

• Strong core gameplay loops

3. China's Gaming Ascendance

Mobile success:

• Captured 5 of top 10 grossing mobile games globally

• Key titles included Honor of Kings and PUBG Mobile

• Demonstrated superior development efficiency

HD gaming breakthrough:

• Successfully launched major titles like Black Myth: Wukong

• Showed ability to compete in AAA space

• Leveraged lower development costs

• Maintained more intense development cycles

Strategic advantages:

• Continued investment during industry downturns

• Strong incentive structures for developers

• Efficient approval and decision-making processes

• Clear strategic focus on Western expansion

4. Live Operations Excellence

Key developments:

• Brawl Stars achieved 6x revenue increase through improved operations

• Clear performance gaps emerged between similar titles based on live ops quality

• Companies began reevaluating their live ops team structures

• Increased investment in live operations capabilities

• Greater emphasis on turning around declining games

5. UGC Platform Challenges

Despite high engagement:

• Venture-backed UGC studios struggled to achieve profitability

• Platform holders (Roblox, Epic) maintained majority of profits

• Business models shifted toward marketing activations

• Monetization remained elusive despite strong user metrics

• Short session lengths (avg. 7 minutes) limited monetization potential

2025 Predictions: Key Trends to Watch

1. New Development Models

Expected changes:

• Shift away from monolithic development approaches

• Integration of more agile methodologies

• Adoption of Chinese development practices

• Streamlined approval processes

• Reduced bureaucracy in creative decisions

• Greater emphasis on efficiency and speed

2. AI Integration Levels

Three distinct phases expected:

• Level 1 - Basic Integration:

  • Data analysis automation

  • Concept art generation

  • Testing and QA support

• Level 2 - Pipeline Integration:

  • Automated battle pass systems

  • Art pipeline automation

  • Content generation systems

• Level 3 - AI-Native Games:

  • AI as core gameplay mechanic

  • Dynamic content generation

  • Adaptive gameplay systems

3. Market Recovery Catalysts

Key events that could drive recovery:

• Nintendo Switch successor launch

• GTA VI release

• Gaming IPO market revival

• Increased M&A activity

• Private equity deployment

• New game development initiatives

4. Companies to Watch

Notable players for 2025:

• Embracer Group:

  • Continuing restructuring

  • Potential acquisition target

  • Asset spinoff completion

• Nintendo:

  • New platform launch

  • Fresh software lineup

  • Market share opportunity

• Take-Two:

  • GTA VI release

  • Zynga integration progress

  • Revenue growth potential

• Tencent:

  • Scale advantage utilization

  • Western market expansion

  • Technology leadership

• CD Projekt Red:

  • Witcher 4 development

  • Cyberpunk franchise recovery

  • Studio reputation rebuilding

5. Industry Transformation

Workforce and operational changes:

• Continued but reduced layoffs

• New hiring in growth areas

• Greater emphasis on efficiency

• Focus on data-driven decision making

• Increased importance of user acquisition optimization

• Evolution of monetization strategies

The gaming industry enters 2025 at a crucial juncture, with traditional models being challenged by new approaches, technologies, and market dynamics. Success will likely favor those adapting to these changes while maintaining operational efficiency and creative excellence.

• Major structural and cultural problems afflicting Ubisoft

• Latest outlook on Unity

• Quick update on Applovin

• China and the impact on global gaming companies

• Microsoft's acquisition of Activision; the impact and future outlook

• Quick update on Roblox

Join us for this newer format and stay tuned for more Pixels & Profits; we’ll have more cooking by the end of the year and into 2025!

🎧 Listen on Spotify, Apple Podcasts, or Anchor

Speakers:

• Joseph Kim. CEO at Lila Games.

• Brian Peganoff. Founder at Timber Advisors.

• Matthew Kanterman. Director of Research, Blue River Financial Group.

🎮 Hot Takes: Ubisoft's Struggles, Unity's Revival, and Microsoft's Game Pass Gambit

The gaming industry continues to evolve rapidly, with several major storylines developing across key players. Here's the Pixel bros take on the most important trends and takeaways from recent developments:

🎯 Ubisoft's Structural Challenges

• Execution Issues Continue: Ubisoft's recent game delays (including Assassin's Creed) and underperforming titles (Star Wars Outlaws) highlight ongoing execution problems

• Development Model Crisis: There are growing questions about whether Western studios can sustain large-team, high-budget development approaches, especially given recent failures:

  • Warner Bros' Suicide Squad ($200M loss)

  • Sony's Concord (pulled after 2 weeks)

  • Bethesda's Redfall

  • Battlefield 2042

• Path Forward Options:

  • Consider focusing primarily on Assassin's Creed franchise

  • Explore hybrid development models leveraging Asian studios

  • Potential acquisition, though complicated by French labor laws and ownership structure

  • Private equity buyout, though challenging without major restructuring ability

🔄 Unity's Turnaround Attempt

• New Leadership Impact: Under CEO Jim Whitehurst and now Marc Bromberg, Unity has:

  • Cut costs and divested non-core assets

  • Killed controversial runtime fee policy

  • Brought in new talent to revitalize ads business

  • Reset street expectations

• Positive Technical Progress:

  • Unity 6 bringing meaningful improvements in rendering and optimization

  • New systems like GPU Resident Drawer and enhanced render pipelines

  • Better developer sentiment around recent updates

• Key Challenges:

  • Ads business losing share to AppLovin

  • Questions about the long-term viability of the current pricing model

  • Need to improve operational efficiency

  • May need to consider going private for a major pricing model transition

📱 AppLovin's Rising Star

• Strong Execution:

  • Now hitting $1B quarterly revenue

  • 75% EBITDA margins on software business

  • Strong free cash flow generation

  • Gaining significant market share in mobile ads

• Market Evolution:

  • Moving beyond just mobile into CTV and web

  • Publishers seeking alternatives but AppLovin's dominance growing

  • Maturing into a major ad tech player

🎮 Microsoft + Activision: The Game Pass Question

• Key Strategic Questions:

  • Will Activision be larger or smaller in 5 years under Microsoft?

  • How will Game Pass impact traditional game sales model?

  • Can Microsoft effectively monetize mobile gaming?

  • Future of Xbox hardware vs cloud gaming

• Industry Impact:

  • Creates opportunity for competitors like EA's Battlefield

  • Questions about maintaining annual Call of Duty cadence

  • Potential for ad-supported Game Pass tier

  • Mobile app store implications

💭 Final Thoughts

The gaming industry is at an interesting inflection point. Traditional Western AAA development models are showing cracks, while Asian studios (particularly Chinese) demonstrate the capability to execute large-scale projects successfully. Meanwhile, business model innovation through subscriptions and advertising continues to reshape how games are monetized.

The next few years will likely see continued evolution in development approaches, business models, and market leadership. Companies that can successfully navigate these changes while maintaining execution quality will be best positioned to thrive.

What are your thoughts on these industry developments? I'd love to hear your perspective in the comments.

Speakers:

• Joseph Kim. CEO at Lila Games.

• Brian Peganoff. Founder at Timber Advisors.

• Matthew Kanterman. Director of Business Development at Supersocial.

In this latest episode of Pixels & Profits, we examine the current state and future prospects of two major but struggling gaming companies: Embracer and Ubisoft.

Both companies have faced challenges in the current market environment, and the discussion aimed to illuminate their strategies, financials, and potential for growth.

Embracer: A Roll-up of Studios and IPs Background

• Embracer is a Swedish company that has grown through acquisitions of multiple game studios across various platforms (PC, console, mobile, board games, and other media).

• The company operates through four segments: PC and console games, mobile games, tabletop games, and entertainment and services.

Recent Developments

• Embracer has been shifting its business by closing some studios and selling others, such as Gearbox (sold to Take-Two) and Saber Interactive.

• The company has faced challenges due to the shift from a zero-interest-rate policy (ZIRP) environment to a higher interest-rate environment.

Financials and Debt

• Embracer's debt situation has been a concern, with the company taking on more debt to finance large acquisitions towards the end of the ZIRP era.

• The company has been working to meet debt covenants by selling assets and raising cash.

• As of Q3 2023, Embracer's core business generated around €3.6 billion in revenue, with approximately 11,000 employees and 135 games in development.

Future Outlook

• Embracer's PC and console division has the most significant potential impact on the company's future success.

• The company's tabletop gaming business, including popular titles like Settlers of Catan and Ticket to Ride, has significantly contributed to revenue and profitability. Surprisingly, it was 35% of last year’s fiscal contribution to revenue.

• Embracer's mobile gaming business faces headwinds, particularly in the hyper-casual segment, and may be impacted by changes in fingerprinting and user acquisition.

Ubisoft: Focus on Big Franchises and Live Service Games Background

• Ubisoft is a French company known for developing and publishing games for console, PC, and mobile platforms.

• The company's strategy focuses on expanding the reach of big brand games (e.g., Assassin's Creed) and building a recurring revenue model through live service games (e.g., Rainbow Six Siege).

Financials and Efficiency Concerns

• Ubisoft has seen a sharp decline in console and PC revenue but has experienced growth in its mobile segment.

• The company has faced criticism for its low revenue per employee compared to industry peers, suggesting operational inefficiencies.

• Ubisoft's R&D expenses have been high, and the company has struggled with game delays and quality issues upon release.

Upcoming Titles and Future Outlook

• Ubisoft has a lineup of highly anticipated titles for fiscal year 2024, including Avatar: Frontiers of Pandora, Assassin's Creed Mirage, and Skull and Bones.

• The company also invests in free-to-play and mobile titles based on its popular franchises, such as Rainbow Six Mobile, The Division Resurgence, and Assassin's Creed Jade.

• Concerns remain about Ubisoft's ability to execute on its ambitious slate of games and its capacity to adapt to industry trends, such as the increasing success of smaller, more agile development teams.

Conclusion

Both Embracer and Ubisoft face unique challenges in the rapidly evolving gaming industry.

While Embracer's focus on acquisitions and diverse portfolio of studios and IPs has provided a foundation for growth, the company must now navigate a more challenging financial environment and optimize its operations.

Ubisoft, on the other hand, has a strong lineup of upcoming titles and a focus on big franchises. However, it must address concerns about its operational efficiency and ability to adapt to changing market conditions.

As the industry continues to evolve, both companies must demonstrate agility, innovation, and strong execution to succeed in the long term.

Be sure to check out the full discussion on YouTube or Podcast!

Speakers:

• Joseph Kim. CEO at Lila Games.

• Brian Peganoff. Founder at Timber Advisors.

• Matthew Kanterman. Director of Business Development at Supersocial.

Outline:

0:00 Intro

2:06 Overview of Nvidia’s business

10:30 Game developer aspects of Nvidia’s business

15:02 Future drivers of growth

31:10 Nvidia valuation

38:26 Nvidia competitive landscape

44:21 Future outlook

▶️ The Rise of NVIDIA: More Than Just Gaming

The year was 2015, and I found myself at an AI conference in San Francisco, standing next to Ray Kurzweil, one of the most renowned experts in the field. He had just delivered a captivating keynote on the potential impact of AI on technology and society. Eager to learn more, I approached him with a question:

"Hi Ray, I loved your talk. When you mentioned the significant impact of AI, which specific industries do you think will be affected first?"

Ray's face turned sour as he stared at me with a surprising intensity. "Every industry. Everything. AI will impact everything!" he exclaimed.

I was taken aback by the strength of his emotions as he abruptly turned and walked away. Rude? Perhaps. But his words echoed in my mind, hinting at the magnitude of the AI revolution that was to come.

Fast forward to today, and Ray's predictions are coming to life before our eyes. Even before the explosion of ChatGPT, I was incredibly excited about AI's potential. However, it was Tesla's AI Day that truly crystallized the immense possibilities for me.

Once again, gaming finds itself at the forefront of innovation. From the rise of free-to-play business models to the adoption of PCs, 3D graphics, app store monetization, and now AI, the gaming industry consistently pushes the boundaries of what's possible and pushes innovations into other industries.

In our latest episode of Pixels & Profits, we delve into the world of Nvidia, a company that has evolved from a gaming GPU provider to an AI powerhouse. Here are the key takeaways from our discussion:

• Nvidia's Business Transformation:

  • Data center revenue now surpasses gaming, accounting for over 80% of total revenue.

  • The surge in AI demand, fueled by the success of natural language interfaces like ChatGPT, has propelled Nvidia's growth.

• Empowering Game Developers:

  • Nvidia ACE (Avatar Cloud Engine) offers tools for creating AI-powered digital avatars.

  • Omniverse provides a platform for building immersive 3D worlds and metaverse applications.

• Three Pillars of Future Growth:

  1. Current AI applications across industries (automotive, finance, pharmaceuticals, gaming) and functions (customer service, automation, fraud detection, data analysis).

  2. Emerging AI applications that will drive unprecedented demand for Nvidia GPUs.

  3. Human replacement in the workforce through AI and robotics, impacting a significant portion of GDP.

• Building a Competitive Moat:

  • Nvidia offers a full-stack solution: hardware, software, algorithms, libraries, and services.

  • Massive investments in R&D ($45.3B to date) and a robust patent portfolio.

  • Strategic partnerships and acquisitions, such as Mellanox for InfiniBand, strengthening market position.

• Valuation and Investor Perspective:

  • Traditional valuation metrics may not capture Nvidia's rapid growth potential.

  • Investors should focus on Nvidia's long-term potential to shape the future of technology.

  • Risks include a slowdown in enterprise AI adoption, competition from tech giants and startups, and resolution of bottlenecks.

• Visionary Leadership:

  • Jensen Huang, Nvidia's CEO, is a visionary leader with a proven track record of innovation.

  • Nvidia's vision goes beyond gaming and AI, aiming to redefine human-technology interaction.

As we navigate an increasingly AI-driven world, Nvidia stands tall, controlling the critical infrastructure that will shape our future. The key questions we must ask when considering Nvidia's future value are:

1. How much more growth is possible for AI applications and Nvidia's primary market?

2. Can Nvidia maintain its dominant market share in the face of competition?

If Ray Kurzweil's words are any indication, AI's impact will be nothing short of transformative. For investors, game developers, and technology enthusiasts alike, Nvidia is a company to watch closely as the most dominant player in enabling AI and simulating human intelligence for the world.

See below to check it out!

Top 10 Charts

• Oh damn, Roblox hit #1. It’s generally in the top 10 for downloads but has hit #1 in downloads and dethroned BOTH Royal Match (the king of revenue) and Monopoly GO for #1 worldwide revenue. Congratulations!

Roblox: A Deep Dive into the Gaming Giant’s Business and Future Prospects

Hey Game Devs and Industry Enthusiasts!

🎧 Listen on Spotify, Apple Podcasts, or Anchor

Speakers:

• Matthew Kanterman. Director of Business Development at SuperSocial.

• Joseph Kim. CEO at Lila Games.

• Brian Peganoff. Founder at Timber Advisors.

We’re unpacking the latest Pixels & Profits podcast on Roblox 2023. Watch the video above or read below.

So, grab your coffee, and let's dive into the present and future of Roblox!

The Big Picture: Roblox Today

• A UGC Giant: Roblox, the user-generated content (UGC) behemoth, boasts over 70 million daily active users. That's a staggering figure, hinting at a user base north of 400 million. Talk about playing in the big leagues!

• Engagement Galore: With over 60 billion hours of yearly engagement, each user spends about 2.5 hours daily on the platform. The numbers are growing, with bookings hitting $3.5 billion this year.

• Post-Pandemic Growth: Unlike many pandemic-hit businesses, Roblox didn’t just survive; it thrived and continued growing post-COVID, questioning the norms of digital entertainment.

Is Roblox a Gaming Platform or a Social Network?

This is the million-dollar question. As Roblox evolves, it blurs the lines between a gaming platform and a social network. The company’s direction in the coming years will heavily influence its market positioning and growth trajectory.

Profitability: The Achilles Heel

Roblox faces a common challenge among tech giants - profitability. Despite impressive growth metrics, turning those into real cash flow remains a puzzle. With a focus on operational efficiency and EBITDA margin growth, they’re on a mission to crack this code.

Analytics and Transparency Concerns

A point of contention is the reliability of Roblox’s analytics. While some discrepancies in data are expected, the platform must maintain transparency, especially when investor confidence is on the line.

Financial Health: A Closer Look

• 2023 Bookings: Around $3.4 billion, with a 2024 consensus of $4 billion.

• Valuation: The market cap hovers at about $25 billion, but questions about profitability and EBITDA remain.

Growth Opportunities and Challenges

• Subscriptions and Advertising: These two are the golden tickets for Roblox. Subscriptions could revolutionize how users interact with content, while advertising might unlock new revenue streams.

• E-commerce: A new frontier for Roblox, allowing real-world item sales. However, the effectiveness and impact of this move are yet to be seen.

• AI and Efficiency: AI tools like real-time chat translation and content moderation could be game-changers, reducing operational costs and enhancing user experience.

The Competition: Epic Games and Meta

Let’s not forget the competitive landscape. Epic Games and Meta are significant players, each carving their unique path in the 3D social platform space. Roblox needs to stay agile and innovative to maintain its edge.

Stock-Based Compensation: A Red Flag?

Roblox’s liberal stock-based compensation has raised eyebrows. While it’s a common practice to attract talent, the lack of cash flow to counter the dilution is a concern for investors.

Acquisition Potential

There’s always a chance of acquisition, especially by giants like Microsoft. However, any acquisition would need to align with the founders’ vision and offer operational independence.

Final Thoughts

In conclusion, Roblox is at a fascinating juncture. It’s a blend of a social network and gaming platform with tremendous potential, but also faces significant challenges. Keep an eye on their AI initiatives - these could be the key to their long-term success.

That's all for today! Stay tuned for more insights and discussions on the ever-evolving world of game development. Until next time, game on! 🎮🚀

For those of you who missed it, check out:

• Pixels & Profits Ep. 1: Where is the Games Industry Today?

• Pixels & Profits Ep. 2: The Console Wars, part 1

Game Over Microsoft?

Some interesting points that came up during the latest Pixels & Profits discussion on The Console Wars:

• Microsoft is going all-in on Game Pass and may not even care about the hardware business if they can make Game Pass successful. Was this a failed McKinsey & Co. strategy, or can this work?

• If Microsoft fails at Game Pass, this may be the beginning of the end of gaming for the company.

• The success of Starfield by Bethesda may be an important milestone in the potential success of Game Pass.

• Live services and F2P may disproportionately impact the existing gaming ecosystem; live services extend the lifetime of games, and F2P may steal share from premium experiences in the future.

• IMHO, Microsoft’s biggest mistake with Xbox was ceding the FPS market to PC. I would argue that the console wars of 2023 has shifted to Sony vs. Nintendo vs. PC. Each console had dominant genres and titles in previous generations, making buying it worth it. With the decline of Halo and no strong exclusive titles, why does anyone have to buy an Xbox?

• New play patterns have emerged for competitive multiplayer games involving groups of players playing together on PC using Discord. This is harder to replicate on a console.

• Despite the PR from console makers, we do not believe mobile growth strategies from them are meaningfully relevant.

• I believe that video game IP are the new comic books. Welcome to the new age of the Sony Games Universe (SGU)

Watch and then join the discussion in the comments below!

▶️ Pixels & Profits: The Console Wars (Part 2 of 2), Microsoft Game Over?

🎧 Listen on Spotify, Apple Podcasts, or Anchor

Speakers:

• Joseph Kim. CEO at Lila Games.

• Brian Peganoff. Founder at Timber Advisors.

• Matthew Kanterman. Director of Research at Roundhill Investments.

OUTLINE:

0:00 Intro

0:56 Impact of PC gaming to console gaming market

4:51 Why Microsoft's console business is in danger

6:26 Microsoft may not care about Xbox and hardware, Starfield will be a good test 7:43 Microsoft = Game Pass or BUST!

10:12 Impact of live services and F2P to console gaming

16:14 Does live service concentrate the market?

19:00 How important is mobile gaming to console makers - come on!

25:49 Primary growth drivers for console market

30:10 Outlook for console wars - the potential impending doom of Microsoft

Thanks to all of you who DM’ed me about our first episode of the Pixels & Profits series, and we’ll keep going so long as there is interest. So please like and comment if you want to see more of these!

High-Level Thoughts on The Console Wars

The tides of war have shifted. Today, the Console Wars is just as much about different strategic approaches as much as hardware specs or exclusive content.

Exclusive content still matters. As famed private equity investor Roger McNamee once stated:

Between the content and the audience, everything in between is a choice.

Against this strategy, Sony and Nintendo have amassed a critical scale of must-have content. Hence, they should continue to be able to sell new consoles for generations to come. Conversely, Microsoft seems to be going all-in on a platform-agnostic strategy against subscriptions via their GamePass initiative.

At this point, I believe Microsoft will face an existential crisis after this generation of consoles. Even further, Microsoft gave up its beachhead of owning the FPS gamer audience. This segment has now been ceded to PCs.

Hence, it may be do or die on GamePass.

Further, the real Console Wars, in my opinion, are now: Sony vs. Nintendo vs. PCs.

New dominant gameplay patterns have emerged on PCs for the younger generation: mixing community (e.g., via Discord) + competitive gameplay. Hence, PCs have become the dominant platform for FPS and MOBA players.

Note also FPS has historically been the #1 genre on consoles. A slightly dated graph is below:

Historical Overview of The Console Wars:

For your reference, below is an overview of the historical console launches. Thanks to Brian Peganoff for the data!

Generation 6 (1998 - 2013):

Generation 7 (2005 - 2017):

Generation 8 (2012 - 2020):

Generation 9 (2021 - Current):

▶️ Pixels & Profits: The Console Wars (Part 1 of 2), Market Dynamics and Company Overview

Speakers:

• Joseph Kim. CEO at Lila Games.

• Brian Peganoff. Founder at Timber Advisors.

• Matthew Kanterman. Director of Research at Roundhill Investments.

OUTLINE:

0:00 Intro

1:05 Console market overview: Sony, Nintendo, and Microsoft

9:37 Determinants of success for the console market

12:53 6th Generation: 1998 - 2013

17:18 7th Generation: 2005 - 2017

23:10 8th Generation: 2012 - 2020

29:58 9th Generation: 2021 - Present Day

33:29 Console makers differences in strategy

We live in an increasingly dynamic, interconnected, and interdependent world.

Global macro, the economy, and the movements of large public companies affect the industry in increasingly interdependent ways.

Hence, understanding the context of where the games business is headed and the movements of big public company players helps inform how our businesses will be impacted: from small startups like mine to bigger industry players.

Two guys who are super dialed into public markets and have strong, insightful opinions are Brian Peganoff (former Deutsche Bank investment banker specializing in games, Corp Dev at Glu Mobile, and currently an advisor to several games companies) and Matthew Kanterman (former equity research at Bloomberg, Director of Research at Ball Metaverse, and currently Director of Research at Roundhill Investments).

Welcome to the inaugural episode (hopefully more to come) of Pixels & Profits, a new segment focusing on the business of games and the strategy/movements of public game companies. You and I should be able to learn a lot about finance, upcoming trends and movements in the games industry, and more from these guys.

Give our first episode a watch and if you like what you see and want more, please share and like to see more!

In this week’s discussion:

• Where are we today in the games industry? How has the industry changed?

• State of M&A

• Rovio + SEGA acquisition take

• Scopely + Savvy acquisition take

• Outlook of Activision + Microsoft acquisition

• AI + Nvidia: Holy tailwinds! Nvidia + discussion on AI

• AI + the concept of long vector to small vector development

• Embracer: What happened to the $2B deal? Who was it?

• Ubisoft

• Take-Two

• Unity

• EA

• What to watch out for. Potential scenarios coming up

▶️ Pixels & Profits: Where are We? M&A and Public Game Companies Outlook | NVDA, EMBRAC-B, UBSFF, TTWO, EA, U, APP

Speakers:

• Joseph Kim. CEO at LILA Games.

• Brian Peganoff. Founder at Timber Advisors.

• Matthew Kanterman. Director of Research at Roundhill Investments.