Why Gravity Is a Cheap Stock

| About: GRAVITY Co., (GRVY)

Quick Company Background

Trading just below NNWC and NCAV, Gravity (NASDAQ:GRVY) is a Korean MMORPG (Massively Multiplayer Online Role Playing Game) company.

(For more information and insight, go through the GRVY discussion in the value investing forum.)

The company released their most popular game, Ragnarok Online, back in 2001 which went on to being adopted in Japan, China and other Asian countries. The popularity spawned off Ragnarok the Animation, Ragnarok Mobile, and Ragnarok Online DS.

So we see that the success of one game can create multiple “child” products adding to revenue for the company.

But the company that once traded above $5 is now close to liquidation value. It’s risen a lot from its lows but is still far too cheap.

Why GRVY is a Cheap Stock

Ragnarok Online was introduced in 2001 and 9 years later, the sequel still hasn’t been released. The company underwent several closed and open testings for Ragnarok Online 2, but during the final test phase, the reception to the new game was less than mediocre.

This prompted the company to completely revamp the game which equates to delays, and on the Street, uncertainty is the devil. No matter how much potential a company has, unless that potential is clearly visible, it is considered a dog.

At the moment, GRVY is getting the dog treatment. That’s where value investing comes in.

Understanding Multiplayer Gaming

At the moment the market isn’t pricing in any future outlook for GRVY. I don’t like talking much about growth but at $1.67, any future game that is released that generates cash is basically a free gift.

In Asia, multiplayer games are huge. Professional gamers make a good living in Asia and there are plenty of them. Unlike Western countries where sports plays a big role, Eastern nations are limited due to the geography, culture and advancement of the internet, just some of the reasons why games play a huge role. You don’t see many PC cafes around anymore, but go to Asia and they are on every street with people playing games all day and night.

Do a little research on StarCraft and you will realize that this multiplayer game was released in 1998 but professional StarCraft matches still take place.

Asset Valuation

The games business model is also a good one where Gravity receives royalties and fees for services to maintain, train, set up and fix the game servers. This consistent stream of revenue is why they have $54.6m in cash compared to their market cap of $46.7m.

No inventory, very low receivables and easily manageable debt displays the strength of the balance sheet.

  • NNWC comes out to $1.71
  • NCAV comes out to $1.91

From these numbers alone, you can see that even by ignoring all future growth and potential, it’s cheap with a valid business. But the truth is that GRVY is capable of profit. Although the realization of the stock price depends on how well the Ragnarok Online 2 is received, the downside is very well protected versus the upside.

Disclosure: I hold GRVY at the time of writing.

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