[Into the Stocks] The Lineage Setback That Created the Emperor Stock, Is Spring Coming for NCSoft?

[Asia Economy Reporter Lee Seon-ae] The reputation of 'emperor stock' NCSoft has been seriously tarnished. The stock price, which soared to 1,048,000 KRW in February last year, has continuously hit new 52-week lows this year, eventually falling to 347,500 KRW. While it was spotlighted as a beneficiary of the COVID-19 pandemic and achieved a remarkable twofold increase from 540,000 KRW to 930,000 KRW in 2020, it is now down to one-third of that value. What is the reason behind the fall of this emperor stock?

The stock price drop is too steep to be attributed solely to the market crash. Ultimately, the decline was driven by concerns over NCSoft's earnings decrease. The combination of earnings decline and market headwinds resulted in an unusually sharp drop. On the 7th, Samsung Securities predicted NCSoft's Q2 operating profit to be 115.3 billion KRW, a 53% decrease compared to the previous quarter. NH Investment & Securities forecasted 146.4 billion KRW, and Cape Investment & Securities expected 139.5 billion KRW. The earnings decline outlook stems from concerns over revenue decreases in Lineage W and Lineage 2M. Lee Gyu-ik, a researcher at Cape Investment & Securities, analyzed, "The daily average revenue of Lineage W is falling more than 40% compared to the previous quarter, and Lineage 2M is about 20%, declining faster than expected."

The exodus of Lineage users is dragging down earnings. Lineage was the flagship game responsible for NCSoft's performance, but after controversies over its monetization structure arose, users have been leaving. The main contributor to the emperor stock's status (Lineage) has also become a factor holding back its stock price.

NCSoft's operating revenue (net sales) was 983.6 billion KRW in 2016, rising to 1.7587 trillion KRW in 2017 when Lineage M was released. Last year, it was recorded at 2.3088 trillion KRW. The stock price also responded. The stock, which hovered around 200,000 KRW in 2016, showed an upward trend every year and surpassed 1 million KRW in February last year, becoming an emperor stock. However, as new games outside the Lineage universe failed to meet user expectations, the stock price began to collapse. Blade & Soul 2, released on August 26 last year, failed to succeed, ranking 11th in sales on its release day. Users turned away from Trickster M, released the same year, as it applied the Lineage-style monetization model unchanged.

Repeated target price downgrades by securities firms also cooled investor sentiment. NH Investment & Securities (600,000 KRW → 550,000 KRW), Samsung Securities (550,000 KRW → 440,000 KRW), Cape Investment & Securities (550,000 KRW → 440,000 KRW), and Eugene Investment & Securities (650,000 KRW → 550,000 KRW) all lowered their target prices. Samsung Securities researcher Oh Dong-hwan advised, "Since a stepwise decline in earnings may appear until the end of the year, it is necessary to lower expectations for a stock price rebound."

When will NCSoft's stock see better days? The outlook is bleak. Game stocks are influenced by existing game performance and new release expectations. Since NCSoft's new game 'TL' is scheduled for release in Q4 this year, there is no momentum from new releases until Q3. Ultimately, the appearance of TL in Q4 and expectations for new releases next year will determine NCSoft's stock direction. Given the time lag until new game results and concerns over declining revenues from existing games, a stepwise decline in profits is highly likely.

Samsung Securities researcher Oh Dong-hwan emphasized, "Although two unreleased new titles including Blade & Soul S are scheduled for release, information disclosed so far is limited, so more detailed new game information disclosure is necessary for a stock price rebound." Moreover, the possibility of delay cannot be ruled out. Eugene Investment & Securities researcher Jeong Ui-hoon said, "Considering that TL is a major new game and that three games are concentrated for release in Q4, there is a possibility that the release could be postponed to Q1 next year. However, once the new lineup is concretized and full-scale new game releases occur, external growth will still be valid."