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Gravity 3rd Quarter Results: Time to back up the truck?

November 24, 2012

Gravity’s 3rd quarter results were disappointing, a loss of $.05 per share, on decreasing revenues, both sequential and YOY. Second quarter results had pointed to continuing losses, with sequentially decreasing revenues and increased advertising and sales expenses related to the lauch of Ragnarok II. I should have foreseen that this would probably continue for several quarters at least, but I think I was just blinded by the results of my first investment in the ADRs. I always have to remind myself that you see what you want to see; Kahneman! After all, my first forray into GRVY produced a better than 100% return; I loaded up about this time last year, after taking a small initial investment two and a half years ago, and cashed out last March when the ADR price spiked on news of the lauch of Ragnarok II. I’ll take credit for the loading up around $1.20 but I’ve got to admit that selling last March at the high was SHEER LUCK. I had no idea that the ADRs would fall so far so fast. Little did I know that 1) acceptance of the new game would be slow (if it happens at all) and 2) that there would be enough additional sales expense to produce operating losses, at least until additional revenues kick in (hopefully). In fact, I began a new position last Summer at the $1.70 level, thinking that getting back in at the net-net level was bound to be safe once the new game was launched and game development expenses were finished. But now, here we are again, back at the $1.20 level. Is it time to ‘back up the truck’? How do I know? Mr. Market is a queer fellow! The ADRs could drop substantially from here, especially if operating losses continue or increase. The one thing I DO know is that the company still has $1.83 in cash per ADR (down from $1.89 at YE 2011), though some of that is at the subsidiary level and is not directly available to shareholders. This means that at the current ADR price, for each $.55 you invest, you’re getting a dollar (or equivalent Won, in this case) in cash plus the operating business thrown in for free! Is the operating business really worth $-.63 per ADR? Even if the company loses $.05 per quarter for the next few quarters I don’t think so.

Am I ‘backing up the truck’ at this point? Well, not quite yet. After all, we are at the beginning of  tax selling season and I wouldn’t be surprised to see Mr. Market dump a bunch of ADRs on the market over the next month. At the beginning of 2012 the ADRs were trading at $1.45, so anyone who took a position this year is sitting on a loss. Even better, the ADRs subsequently rocketed up to $3.40 in March, meaning that anyone buying in the euphoria rally might just be thinking about dumping their position about now for a nice hefty tax loss. So I’ll just be waiting around with the dump truck to see just how low these ADRs can go.

But to answer Sid’s implied question, did the poor 3rd quarter results shake my investment thesis, NO, the cash is still there, as is the promise of a potentially successful game. Of course, I’m willing to sit on a position in GRVY for YEARS, waiting for Mr. Market to have another manic moment. You should, as always, do your own due diligence and, if you do jump in, be willing to see your investment cut in half (like I’ve experienced with Fortress Paper). So, before you act, ask yourself whether you would have the Chutzpah to invest the same amount again if the ADR price was subsequently cut in half. If not, this kind of investing is not for you!

One Comment
  1. Sid permalink

    Regarding: “I’ve got to admit that selling last March at the high was SHEER LUCK.” Yeah you sold some shares exactly at 52 week high of $3.47.

    Regarding $1.83 cash per ADR – are you just looking at Cash and Short Term Investments per share?


    Should you be focused on the NCAV of 42828 million KRW (69,996.00 Million KRW Current Assets – 27,168.00 Million KRW Total Liabilities) – which comes to $1.42 Net Cash per share ?

    There is *SOME* margin of safety available at current price of $1.15 per share but with lack of catalyst (no buybacks/dividends/activist shareholder) in sight and future prospects, I’m not sure if the margin of safety is large enough.

    Also what are your thoughts on the EBIX drop recently? It’s near your buy price due to some SEC probe rumors.

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