Gravity’s a gaming greybeard

Benj Gallander and Ben Stadelmann
Thursday, March 17, 2011

Does the idea of combining Japanese anime with Norse mythology seem outlandish, but intriguing? If so, it might be worthwhile to consider Gravity, a South Korean video game developer trading at about $2 under the ticker GRVY on the Nasdaq.

The company was started in Seoul in 2000, which in the PC gaming industry makes it somewhat of a greybeard. Ragnarok Online—The Final Destiny of the Gods was launched in 2002 and became a mega-hit in Asia. This achievement was influential in shaping the genre known as MMORPG (massive multiplayer online role-playing games) and helped pave the way for the likes of World of Warcraft.

An IPO in 2005 successfully raised more than $100 million (US), but the growing enterprise got into deep trouble. Corrupt management, botched expansion plans, litigation, and failed investments all added up to disappointed shareholders. In 2008 Japanese GungHo Online Entertainment bought a 52.4 percent majority stake in Gravity, and now it appears to be run in a far more businesslike fashion.

After years of losses, the company had earnings in 2009 of $6.1 million on revenue of $50.7 million (the corporation reports in Korean won and converts to US dollars for the sake of convenience). Profit for 2010 will be less than that; the first nine months tallied $3.1 million. As of last September, the balance sheet held $63.8 million in cash, which works out to about $2.30 per share. That will be diminished by $10.1 million this quarter, when the purchase of a controlling interest in Barunson Interactive, another Korean game developer, is accounted for. Full-year results will be available shortly after the AGM later this month.

Gravity has five titles that are available worldwide and is working to diversify its offerings with fresh games and new versions for handheld consoles and mobile phones. But a key catalyst will be the rollout of the Ragnarok sequel, Legend of the Second. The game has been in development for years and has been plagued with false starts and postponements. The results from large-scale testing are promising, and sneak peeks at the beta show lush 3-D animation and sophisticated features.

Computer technology is now catching up to the imaginations of game designers. Vast server farms, specialized video cards, high-resolution displays and broadband Internet access are all combining to provide gamers with a deeply immersive experience.

Some may scoff at this exploration of virtual reality, or lament the distraction to a young generation that should be doing homework or playing with friends on the street. But it’s the producers of passive entertainment that ought to really worry. The game industry has already surpassed Hollywood, and the gap is set to widen. Games engage players on multiple levels and allow them to be architects of their experience.

For investors, participating in this industry isn’t easy. Many players are very expensive or part of entertainment conglomerates. Gravity is a contrarian pick, a deep value play with a strong balance sheet in a company with minimal analyst coverage. A dramatic change in fortunes will be needed to levitate Gravity to the $6-to-$8 target range that has been set for this stock in the Vice President’s Portfolio.