Square-Enix Sees Profits Sink

Gamespot reports that RPG maker Square-Enix reported an almost 70% decline in net profit for most of last year. From the article: "Square Enix attributed most of its financial difficulties to its primary business--games. The company had a profitable nine months, releasing a number of hits: Kingdom Hearts II, which shipped 1.1 million units in Japan since its release in December; Romancing SaGa for the PS2, which shipped 500,000 units (Japan: 450,000, USA: 50,000); and Dragon Quest VIII, which shipped 430,000 units in North America. However, the numbers couldn't match those of the previous year, when Dragon Quest VIII shipped 3 million units in its first three days of release in Japan. The segment's sales fell 43.3 percent to 21.2 billion yen ($180 million), and its operating income plunged 95.1 percent to 974 million yen ($8.28 million)."

Comments

Normal Year is a Headline?

[Larkvi]

I have never really understood why it is news that a company that has had a profitable year wasn't as profitable as a previous blockbuster year. Last year, with greater profits, was news; this year just seems normal. Would anyone have a headline saying "Square-Enix has nice, but unexceptional, year"?

Re:Normal Year is a Headline?

[mlyle]

This is because the ideal value of an equity is the value of the company's future cash flows. The dividend-discount valuation models that are used assume a given rate of growth for a certain amount of time before stagnation, and those future cash flows are discounted by a standard 'cost of capital'. A decline in profit indicates that the company may be near the stagnation point, and the value of those future dividends is called greatly into question.

A profitable year isn't enough. Capital markets demand of a growth stock ever-more profitable years. There is room for companies that are stable and not growing much, but they tend to not be valued at a very high multiple over their yearly earnings.