274: The Hottest AI Stock on the Market

0:05But what it's turned into, what it's completely transformed, is into one of these stock stories, I believe that we're going to see a lot more of in the coming years. because this is a company that's kind of upended its entire operations with AI. Right. And in such a way that's different from, say, the chip makers or the data centers, in so much as it's not benefiting from the infrastructural build-out of AI. It's not a pick-and-shovel play for this industry. It's actually in the application of AI is where it's got all its advantages from. Do you know what I mean? We've been waiting for winners to emerge from the AI space in how they apply the technology, not that they facilitate it.

0:50Emmett, how are we doing? Good morning, Mike. How are you doing today? Not too bad. Awful night's sleep after the first night that it gets above 20 degrees in Ireland, you know? Oh, yeah, I know. Well, we were just talking before we went live there. What did you say it's in Beirut today? What's the temperature? 39 yesterday. That's ugly. What's that in American money? 39, probably around 100. Nah, about 95. I think it's above 100. I'm not sure exactly. I know the formula is for every five degrees above zero is the same as nine degrees above 32 in Fahrenheit. Does that make sense? Yeah, then you're differentiated with respect to nonlinear differentials.

1:38and then multiplied by pie. I used to know it down, but it's kind of, it's just slipped away. It's something I rarely use. Yeah. It's like I said, 41 is 5 degrees, 50 is 10 degrees, 59 is 15. So you build it up like that and you can figure it out. RDR system is very hot. Oh God, it's terrible. Oh God. Oh geez, your mammy is probably too hot. Your mammy can't cope. Your mammy can't cope. It's just like, that's really hot. That's late 20s. This isn't a podcast about degrees in Fahrenheit versus Celsius, but someone made the argument, and it actually makes sense as well, because Fahrenheit seems so ridiculous.

2:17But from zero to 100 on Fahrenheit is kind of a very human, humans can't accept this temperature, and anything outside that is dangerous. Well, that's the first argument that makes sense, I heard. That's the scale. That's kind of why. You wouldn't think I studied the physical sciences and the measurements. But that is a very logical explanation for Fahrenheit because clearly degrees, it's freezing, boiling. And then they split it into 100 parts. And that kind of makes sense, but it doesn't make sense to the human being. Like the fact that our bodies malfunction. What's the body temperature? 36.6 degrees or something like that?

3:01Something around that, yeah. So by extension, does that mean that's zero degrees Fahrenheit? No. No, that would mean that that would be close to 100 degrees. Oh, yeah, yeah, yeah. Once you go. Yeah, sorry. Yeah, of course. Sorry. Yeah, exactly. We just spoke about the weather. Of course, you're right. So once you go over that, body's in trouble. Pretty much. Yeah. Tune in next week, folks, as we stumble our way to more obvious things for you to listen in on. This would be an ongoing thing on the podcast where it just becomes a larger and larger part of the entire conversation. Why is the sky blue?

3:36Well, that's a good question. I'm not sure, but let's figure it. We give five minutes for stocks at the end. Well, we have an exciting show, Mike. apart from the fact that you are going to cover app love on a stock that's gone to the moon in the last year i'm going to talk about a stock that i have bought i'm going to buy today that's micro cap and listed in the polish stock exchange it couldn't be any more hidden yet i think it's going to grow 2x in the year ahead and possibly 3 4 5x in the subsequent years so there's a good show ahead of us absolutely yeah we got an announcement though before uh before we kick things off do you oh yeah yeah i have two things to say this day next week uh thursday 21st of august we're holding the very first investicon in collaboration with the erlingus college classic which is an american football game between two long-standing rivals iowa and kansas state colleges iowa state and kansas state i said that yeah but you it's not iowa but apparently that's a big no-no oh sorry i said iowa and kansas state colleges yeah so iowa state and kansas state colleges got you right i've been i've been told i've been told to not call them kansas and not call them iowa so i'm very uh i'm very on age when it comes yeah yeah but still i slip back to my old ways i'm so familiar with both states so anyway investicon investicon is on the historic floor of the irish stock exchange and has a range of world experts giving their top three investments in short 30 minute fireside chat interviews and attendees will walk out with the name of about 18 or 20 actionable investments from collectible whiskey to super high risk high reward potential 100 bagger stocks um that stocks that are positioned to grow 100 fold so go to investicon.ie and grab one of the last seven tickets today the second thing i want to say mike well actually i'm going to say three things wrapped up as two uh we won't do a podcast next week because it's invest con week and you and i are going to be flat out so sorry folks this is the last you'll hear from us on matters of fahrenheit centigrade and blue skies for at least two more weeks um the other second thing i wanted to say was that if you have not signed up for three free months on profit you're mad in the head you should be locked up for crimes against wealth creation let me tell you the numbers about profit which will immediately cause your eyes to glaze over because people don't like numbers when they're read out.

6:11So our system profit, which has been so excruciatingly, is there such a word, devised over 16 years, has had an annual return of 18.7%. It has a sharp ratio, which I'm not going to explain just today, of 0.6737 with a standard deviation of 25.9. So people are like, wake up everyone let me tell you this while others are chasing short-term noise profit locks you into a proven large cap momentum strategy that's designed to crush the market over time it has crushed the market and will continue to crush the market now with that said it's flat this year and that doesn't mean it stays flat this system works so it's a lovely time to start unlike the rest of the stock market which has been soaring this has kind of sat flat but with 16 years data um six months doesn't matter it doesn't matter at all so miss a month and you could miss the move that makes your year so go to useprofit.com backslash mws offer my wall street offer mws offer for three free months before we pull it soon we'll have the link in the show notes but actually it's important to say is a prophet p-r-o-p-h-e-t.com just in case you're listening to this exactly check uh you don't check where this podcast is listed to like your favorite supernatural deity okay so um choose who you most love and that's who you have to think of okay so apploving mike talk to me about apploving a name that always kind of annoyed me but that's that's not an that's not a stock analysis so tell us what happened what's it tell us all about the business yeah maybe there's a hottest stock in the market um up about 500 in the last year up nearly 5000 since the december 2023 wow this is not this is not a good stock for me to check uh because one of my bad habits is i'll always go to the absolute like nadir and be like geez imagine if you just invested right there at the absolute perfect time you'd be up 50 fold since um so yeah Yeah, I don't feel too bad about missing this one, especially not missing it in 2023.

8:28I kind of always remember this stock and it never really, it kind of had a hot IPO there post-COVID time maybe, or had a run anyways post-COVID time along with everything else. And it was one of these kind of game developer app, app development kind of stocks that just didn't really seem to have any X Factor at all. and in fairness like that's how the story goes but what it's turned into and as what what it's completely transformed is into one of these stock stories i believe that we're going to see a lot more of in the coming years because this is a company that's kind of upended its entire operations with ai right and and in such a way that's different from say the chip makers or data centers um and so in so much as it's not benefiting from the infrastructural build out of ai it's not a pick and shovel play for this industry it's actually in the application of ai is where it's got all its advantages from do you know what i mean we've been waiting for winners to emerge from the airspace in how they apply the technology not that they facilitate it so let me hit pause for one sec mike if i was your grandmother how would you describe what applovin does not to cast disparaging remarks on your grandmother's uh intellect but seriously like what do they do Okay, well, first I'd get the Ouija board out because I think that's the only way I'm going to be able to talk to her.

9:51Oh, but Mike, I didn't know. I'm very sorry to hear. Don't be sad. Irish down there to get a mouse card. This is okay. But essentially, and this is going to be difficult because this is a real test of how well you know something is if you can explain it simply. Yeah, so true. But Applovin used to be a mobile games developer that had an integrated ad platform built in. So it would build these apps, it would have these, and then it would sell ads through them, essentially. Through the games. Yeah, so it completely gave up. It sold out in Q2 there, its game development arm, completely, for about a billion quid maybe.

10:29I think it was 900 million, to focus solely on its ad platform, which has become in the last two years one of the most profitable ad tech platforms in the mobile ecosystem. It's been an incredible turnaround. so it's like the trade desk but for computer games i mean say mobile games essentially yeah so it's all built in within within say the software of if you started emmett's uh emmett's stock race you would just download a piece of software from app level and put it into your app and then they would do everything else great i did that it was called the invest app we spent a billion building it and it was the greatest thing ever only it needed a million a minute to keep on there so it's all it's all built around this um what it's called axon it's ai powered engine and that can target optimize and monetize users better than basically any any of its peers and that and that's what's the the excitement around the stock has been from its results not only its results in its financial results but the results it's getting for its clients um and it's interesting i i can't it's it's not that it's a forgotten market but it's definitely an underestimated one so the wall street journal wrote a piece uh started this year saying is app love in the new tiktok or wow paraphrasing that but you know there's more than a billion people a day who use mobile games one billion daily users like i'm not shocked i mean i didn't know that but that sounds about right you know one in seven people yeah when i walk around i see one in seven people that is interesting though like that's a similar audience to tiktok it's a similar audience to facebook's apps and yet there's no and it's probably because it's not consolidated within one you know big player it's all over the place and it's such an there's not a lot of barriers to entry compared to the social media aspect but the sheer volume of eyeballs there is nuts and yet the mobile games ad market in particular it was always underutilized mostly because all the ads were ads for other games because the only thing advertisers knew about the user was that they played mobile games do you know what i mean it was tough to glean more information like you would from someone's social media habits where they would click on uh you know a golfer's page and uh runner's page and be like okay this this is clearly a man and clearly likes sports and X and Y, and now I can sell him new shoes or whatever else, the basic kind of glean information and then process it to provide a targeted ad.

13:08The games industry never had that. So what Apploven was able to do with its AI system was allow game advertisers to expand to other industries instead of just say, you like this game, what about this game? we know enough about you now to say you like this game here are a pair of earrings you're going to love or whatever else so yeah it's oversimplifying it but like the model collects data on users and and includes what the advertisements they're engaging with as well and then they use that sense i mean it makes sense to them yeah and then this is what facebook kind of i don't know if they invented it but they perfected it with their thing they Facebook's ads became so efficient because of the data they were able to collect and then deliver optimized ads to people.

14:00So we talked about how developers essentially integrate app love and software into their own apps and then app love and handles everything. It does the ad auctions, the placements, the targeting. And then the more effective it is, obviously, the more money everyone makes. So it's a win-win because obviously app love and takes a little bit off the top. But the developer gets more from advertisers and the advertiser actually gets more ROI as well then. Do you know, many moons ago, when I founded my Wall Street first, we had on our board, Professor Barry Smith, who's head of, I think he's the head of School of Computer Science in UCD in Dublin.

14:37And he is a leading expert on recommender systems. And at that time, I remember him explaining to me that when you go into Amazon to buy, I don't know, a colander to drain your potatoes. You might see in your line of sight a book on bridges, which is absolutely nothing to do with colanders. But what in fact it's doing is it's telling you that you can buy a book about bridges on full knowledge, if you like, that you are not there to do that. But at a later point in time, based on your behaviors, there is an outside chance you'll want a book on bridges and you'll think of Amazon and And he explained about recommender systems in great detail to us, John and I, over the subsequent years, because we really wanted to build a system that if you bought shares in Tesla because you loved it, there's a high probability that you would also want to own shares in Lululemon.

15:35Now, as you start to drill down on the assumptions below that anecdote, you start to find where trouble will unveil, which means that just because you like something doesn't mean it's a good investment. But if you look at something like your stock portfolio should be a, I guess, biography or autobiography of your beliefs. That's where we were going on that particular one. But it seems like AppLovin has actually built an add-on, a piece of code where we could have just dropped that into our app, but for a different purpose. Yeah, what's interesting, you talk about recommender systems. I always remember we had your man from TikTok come into my wall street to talk to us once.

16:15Oh, yeah. It really opened your eyes. If you compare, say, you talk about recommended systems and you talk about what the end user gives back in terms of data to the advertisers. So if you're watching TV and you watch an hour of a show, you watch an hour of a monster truck show. Yeah. The advertisers will have one piece of information on you about that you like monster trucks. and they can glean x and y out of that who doesn't i mean monster trucks are great if you watch an hour of tiktoks you've scrolled through i don't know a hundred short form videos you skipped ones you don't like that's right you've stayed on ones you haven't you've shared ones you really like you've saved ones you want to come back to all that stuff and the amount of information is just amplified to another level and i think this is where the flywheel comes in with all of these things with the recommender systems with the this year and we now have the technology to process it to another level with AI as well and this is what Applovin has done so it's kind of a flywheel essentially where if Applovin runs ads across thousands of apps it collects all this ridiculous amount of performance data data then trains the AI which improves the ad targeting more which then brings in more advertisers and kind of on and on we go and it's the scale advantages that these systems can have and build and become so hard to topple then as well.

17:47And what's gotten investors even more excited is that the business has great intentions to expand beyond apps to e-commerce businesses as well. I think as it stands, e-commerce accounts for about 10 % of sales. But again, if it can recreate the effectiveness of its model to the wider internet sales, it could really blow up. So the company estimates that advertisers on the platform see a 2x revenue return on spent really so essentially how good of a business model is that give us a euro and we'll give you back two you know is that the easiest the easiest trade-off of all time um so so again if it's able to recreate that uh success in other areas there's huge huge potential and so wonder why wall street's gotten so excited and then on top of that the numbers have been absolutely outrageous so just we were kind of talking about today we're we're a year late but i don't feel i don't feel too bad about missing this from the start but yeah probably should have been talking about it a lot more in the sense of this is one that's been this might have been humming along for a while now um but just the extent of the numbers in q2 last week were outrageous so revenue was up 77 percent year over year net income was up 164 year over year uh adjusted EBITDA was up 99 year over year with the margin of 81 i'm not really sure i've seen an EBITDA margin of 81 anywhere um no net margin was 61 free cash flow uh was up 72 so just the sheer scale of how fast this company has transformed itself, transformed its margin profiles, the amount of money it's making, how good of a business model has an 81 % adjusted EBITDA margin?

19:36You know what I mean? And like, that's, I think doubled almost year over year. There's very few businesses that can double their margin profile. So it really, really is an interesting business. And then there's just a little cherry on top to this whole story. And I think it's very tongue in cheek. And I think it's maybe more of an advertising play and a little pat on the back for yourselves than anything else but in may of this year uh ceo adam farahi farahi uh he wrote a blog of their pitch to buy tiktok did you hear this no yeah so i'm gonna quote him now it says our proposal isn't a buyout it's a merger with tiktok global covering all assets outside of china and it's a really good piece i like i don't think it's serious but and and i don't think they put it off at all i think he kind of admits that as well he gives a little uh he gives a little proviso at the end he says let's be clear this is a long shot but building one of the world's best advertising ai models was also a long shot and we did that we're not here for small bets our goal is to build a massive business that creates value for the world and our shareholders uh and then he says yeah look that's it our core business remains our focus, yada, yada, yada.

20:49We're not all in on this TikTok thing. But I loved what he wrote down because essentially what he's saying is that, you know, if we're calling it like we see it, a business like AppLovin would add way more value to TikTok than if something like Oracle did it or Larry Ellison or whoever else. And personally, I don't really believe TikTok is going to get sold in such a way. They talk about it a lot. I think it's just going to be this online quagmire, with political kind of positioning and all the rest. But I love the pitch, AppLoving Gabe, which is just, it's just complete advertising for itself.

21:28Do you know what I mean? Yeah, yeah. So he titles, his first title in the blog is The Performance Advertising Gap. And I'm just going to read it out because it's better to read it out than me to paraphrase anyways. So he says, on mobile, where users spend four to five hours daily, platforms like TikTok, despite incredible engagement, fall short on advertising performance. TikTok boasts around 1.1 billion daily users outside of China, yet its ad monetization is well below menace. Why? We believe current restrictions and concerns around data and security severely limit its ability to refine its advertising algorithms needed to maximize revenue.

22:01The economic loss is staggering. There have been reports that TikTok did around$20 billion in ad revenue outside of China in 2024, if powered by our cutting-edge technology, which quadrupled advertisers' spend on our platform in just two years. So there you go. little pat on the back for yourselves we believe that it could reach 80 billion based on our experience advertised to see over 2x revenue return on spend that's 60 billion in lost revenue translating to 120 billion in missed revenue for businesses think about the jobs that could have been created tick tick tock it sells at ai their recommendation algorithm is world-class and one of the first massively scaled implementations based on modern understandings of neural networks yet data and security concerns concerns have hamstrung their advertising potential without a change in control, they may never unlock this value.

22:48That's where we come in. So obviously he's talking about a lot of other things as well in terms of kind of how TikTok has been limited and how there's very real concerns about the China influence over the app and all the rest. But he's also saying we are the tits. Look at how good our advertising model is. There's a hundred billion quid left on the table for your advertisers because you're not using us because we're so good. I thought it was cool. Yeah. And actually, it's very coincidental with something my wife pointed out to me last night where the founder of one of the other big LLMs, not ChatGPT, but maybe Anthropic or one of those other.

23:31Anthropic or Perplexity. I can't remember which one. Oh, yeah. I think it was Perplexity put out a similar. Bit for Chrome. Say again? The Bit for Google Chrome. Correct. yes yes yes yeah exactly so i mean that what what both of those stories that they're remarkably similar but what this shows in both cases is that the founder is thinking very very big yes and has widened their chest and their shoulders are back and they're pushing their way forward in a way that you just have to take notice that like whether or not uh apple oven acquires tiktok and i think most of our spider senses would say that's not going to happen And the same for the acquisition of Google Chrome by, is it, who did we say it was?

24:15Perplexity. Was it a perplexity? That you just, there's a thinking big, there's almost an arrogance to it. And we don't see it. We don't see it happening. But it shows that this founder is thinking the way we want our founders to think. and it causes you to to double down on the belief that this business is going to get to a bigger better place maybe not through that route but through another yeah that's why that's what he said we're not making small bets here you know and then what we've what we've already done it should should prove that to some extent so yeah yeah i think it's really interesting i i'm obviously very impressed um we were talking about fallen hives last year last year last week with Novo Nordisk.

25:03What's the opposite of a falling knife, like chasing returns? Geez, I think I'd know after all these years of talking about it as a, I don't know, a rocket ship. Elevating spoons or something. But I... Nice. Trademark that. Yeah, it is. It's fascinating business. And I think there will be a lot more of these types of businesses. Well, we're already seeing certain businesses, like Upstart and Lemonade were built with AI at their core. This is a business that took AI and absolutely optimized everything within the business. And there's going to be other businesses that try to do that as well. What's the, is it Klarna?

25:48The Buy Now with a Pay Later? Yes, yeah. We're doing everything AI. We are opening up a guinea pig. You know, I think there'll be more businesses like that will try to do something like this. Now, obviously, AppLovin struck gold. I don't know if that's not them just like cutting costs through AI. This is them actually figuring out an entire new system, essentially. But yeah, I think it's interesting. And I think this is what a lot of analysts have said in terms of long term. It's not the people who build out the architecture of AI. it's going to be the best users of AI. And AppLogman is kind of one of the first companies to put their hand up and say, yes, that's going to be us.

26:35So interesting business. I don't think I would touch it at the minute just because it's on such a quite hot run. But again, it's also catching up to its valuation every quarter, you know, as well. But that's very interesting. Of all the things you said there, and you said a lot of interesting stuff, the one that really i i kind of double clicked on in my mind was the fact that you said you while you looked at it you don't regret missing it which shows i don't regret missing because i think we looked at the stock back in 2020 oh i know we did and i know the fact i have notes on it but the but the uh there's a lot to unpack in that statement i'd love to go there it's the hindsight regret you know most of us look at a stock that's grown one two three ten x and if we looked at it at some point in the past irrespective of what we thought yeah you feel oh i looked at that i knew but you didn't know you didn't buy it um i am my my life my investing life the path of my investing life is littered with uh i don't want to say regrets but stocks i looked at that went on to hyper perform and it's very important to keep in check that feeling of regret because every day is day zero today's day zero for all our listeners this is the first day in your investing life because what happened up until this millisecond is irrelevant all what that matters is what you do now and if you keep that in mind at least you're setting yourself up for some kind of um uh good temperament going forward yeah yeah okay so app loving that's interesting another takeaway is i'm gonna have a look at that from my wall street i'm meeting our CMO after this and I'll go hey why don't we look at Applovin so um yeah interesting all right what do you got for us very different business I believe it's entirely different and I'm going to talk about as I teased at the top of the show micro cap stock that I'm going to buy this morning I was on to my Irish broker called Davey um yesterday to get it added to their platform it's such a difficult stock to buy and they don't even allow you buy shares on Warsaw so I had to ask for the listing to go up there on the berlin stock exchange of a secondary listing so um so apart from it being a micro cap stock and apart from its primary listing being on the warsaw stock exchange which only a handful of online brokers like interactive brokers allow you to get access to um as i said it has a secondary listing in berlin and that's where i'm going to buy it um and you know the reason that that's a risk in itself micro cap risk number one And the reason non-US exchanges is arguably a second risk is that the governance outside of America is arguably less thorough than in the US because they have this thing called Sarbanes-Oxley in America, but it doesn't exist outside of the US.

29:32So a risk multiplied by a risk equals white hot. so i am about to talk about something that's so risky so out there um you just have to have to say caveat i'm toward just listen to the words don't get excited but i am putting my money down because i honestly think it's going to 2x within a year to 18 months and um honestly folks this does not constitute financial advice because i play hardball with risk in the knowledge that i get about one in eight one in 7.7 very right and that's where the rewards lie so this could be one of the seven where i'm wrong right um but i don't think so but it might be anyway i think everyone knows ea games the company be behind fifa and madden nfl and the sims um because this company And he's been a zeitgeist for two decades, at least probably three decades, building annual franchises that are part of pop culture.

30:33Then there's Activision Blizzard, which is best known for the Call of Duty. What else do they have? World of Warcraft, Skylanders, Overwatch, another games developer. and it's mastered the art of combining huge day one sales with then years and years of long tail monetization through expansions and seasons and all this kind of carry on. And as discussed, I'm sure on this podcast in the past, Activision was acquired by Microsoft, which gives it that extra firepower and distribution, game pass integration, et cetera, et cetera. But it's not about EA games. It's not about Activision. And it's not even about my favorite, which is of the big three which is take two interactive uh with its crown jewel uh grand theft auto red dead red dead redemption and then its nba 2k series and even just while i'm on take two gta 5 gta v sold over 200 million copies of the game and it still generates millions a day in microtransaction through gta online and then gta 6 is is slated for release later this year and i think i suspect it's going to make take two take two will have the biggest game launch in history with that so there's three big names i have owned shares in those three companies for prolonged periods over the last 25 to 30 years and i'm back on the industry bus but my The latest purchase is almost unheard of Polish developer of games, computer games, and it's called 11 Bit Studios, which looks to me like an undervalued game maker with two engines for growth, which I'm going to pitch on this podcast now.

32:21now so this Warsaw based developer has a reputation for building these really kind of smart games where you get involved in the story and there's a strategy and you know the story unfurls based on the decision you made it's not your typical single person shoot them shooter up or whatever they call those games um it's a very strategic they build strategic titles that stay relevant for years and uh the game that put them on the map which i'm pretty sure 99 plus out of 100 people who listen to this podcast will never have heard of is called this war of mine and then they came out with a game called frost punk which made them a global name in strategy gaming and anyone who's into gaming will know frost punk maybe less so uh this war of mine and they've just released a new game called the altars which is proving they can launch a new franchise with really serious commercial potential so let me explain right now the stock values the entire company at about 100 million euro or about 120 million us dollars for a studio with two major hits in the pipeline one proven and the other brand new that looks like a bargain the altars is brand new and the next two years could be a turning point um when the market finally catches on so 11 bit isn't like these giant publishers that i mentioned at the top of this piece uh which turns out multiple games a year they take a very slow and deliberate approach probably because they have to manage their resources their developers their capital their launches and so on as it goes with a smaller studio and usually one or two they have one or two key launches in in the development cycle and they focus on very high quality but mid budget games that deliver a better bang for the buck if you like so it's a formula that worked with this war of mine where millions of copies were sold um with lots of downloadable content that you pay for and bundles and then frostpunk one which remains a strong seller years and years after launch so growth driver number one is that frost punk 2 is going to be huge it was released on pc in september 2024 it sold 350 000 copies within days and hit almost 600 000 sales by the end of the year and it generated about 18 and a half million us dollars before touching the console market the playstation 5 the xbox latest thing whatever the latest xbox is called xbox 5 let's call it um and nearly half of the buyers uh in the computer ram paid for the deluxe edition which had a higher revenue average revenue per user but that's really just the warm-up act the console launch ps5 the xbox latest box is coming in september just a couple of months away where are we at august next month to check what month we're in.

35:32How privileged is that? So next month, they're launching Frostpunk 2 for PlayStation 5 and this is going to open the doors to millions more players, needless to say. And a Game Pass deal also ensures a massive audience will at least try it, which will drive both DLC, downloadable content sales, and also the franchise recognition. And then from 2026 onwards, excuse me and then from 2026 onwards if frostpunk one is any guide and it certainly is we can expect years of post-launch monetization and expansions and stuff you buy when you're a gamer cosmetic packs and seasonal content and all that kind of stuff so there's a long tail sales on these things with bundles and all types of seasonal discounts that's going to sell well into the late 2020s and possibly into the early 2030s.

36:29So Frostpunk 2 is set to be 11-bits primary profit engine from pretty much now, from the late 2025 through to at least 2027. Multi-platform reach, loyal fans, and a proven game that people actually love. And that could generate between about$60 to$100 million in revenue over its lifetime. Now, just again, if I may remind the listeners, the current market cap, which is its total valuation, is in that ballpark today anyway. So if Frostpunk 2 generates, let's just say 100 million in long-term tail revenue, the entire market cap today is about 120 million. So the second engine for growth that I've bought into in my internal narrative and the reason I'm buying shares when the market opens today or after this podcast is it's launching a brand new franchise, which is always risky.

37:26but risky but this game the altars has really hit the game sorry the ground running and it was released uh just two months ago in june and it's a it's a survival strategy game with a real unique hook that you create all alternate versions of this protagonist and and each one is shaped by different life choices and based on the decisions you make the game takes a different direction i I guess that's where the name The Altars has actually derived from. That's all these alternatives. So what matters, just like a movie, what really matters is, do people love it? Because you could, and just to bring it over to the movie world, you could have the world's best director, script writer, cast, and movie, and produce a flop.

38:14Because what really matters is, do people like it? And a lot of us jump on to IMDB to see if a movie is worth an investment in our time when we when we're about to sit down with family or friends to watch a film well metacritic is where you go it's the imdb of it's the imdb of the gaming world and it's its score um the score for the alters is 84 out of 100 which is absolutely amazing like if you take um games that my son would play like assassin's creed which is a really well-developed beautiful engaging a static game it scores kind of low 70s so the alters is up there around a actually it scores in the high 60s so the alters is up around 84 out of 100 um it's had 280 000 copies sold in the first month on pc xbox and playstation 5 and the game pass impact means that it has huge reach and already has a million stream wish lists on Steam.

39:17So financially, the first month revenue is estimated from the altars at about five and a half to$7 million, which is not huge money. But let's just remember, there's a teeny weeny little microscopic spec in Poland on the Postal Stock Exchange, the worst stock exchange. And by mid-2026, the game could reach around, I reckon 500 to 600 ,000 units sold, which would translate to about 10 to 15 million dollars in revenue. And the long-term sales are probably going to go up to around 700 ,000 sales. Thanks. I got a little bit of help from an online forum to understand what its long-term sales will. And so that's just the first one, the altars one.

40:00So the altars two could realistically double those numbers, especially, you know, with a simultaneous multi-platform release, which these guys are getting better at. And that would give 11-bit the reliable second franchise alongside Frostpunk, so Frostpunk 2. So just as I kind of try and land this sprawling argument that I'm making for a business that I'm sure most people have never heard of, is that 11-bit secret weapon is how well they convert critical praise into commercial success. And it's really important for game studios to do that. So the numbers really tell the story. um frostpunk 2 has scored 86 out of 100 on metacritic um the altars as i said is is in the same ballpark and the steam reviews are very positive for both titles and um what those high reviews basically means that games hold full price longer before they're discounted so you know when you go into um with game stop or or smith's toy store or whatever your local games place is to buy a game you'll see that discounting happens and what was a great title six months ago if it just isn't holding up on great reviews you'll see it down half price they just want it off the shelf and then a downloadable contact and content and sequel updates are stronger so it's the same quality compounding effect that kept this war of mine and frostpunk one selling for years after launch and i've seen it i've seen it over and over with ea games with activision with take two as i said i've owned shares in all of those and it also has uh 11 bit also has a really nice pipeline of other games there's um a new large-scale original title uh being developed they haven't given a whole lot of information and it's coming out in 2029 now if you're going into long-term buy and hold as i do that's like tomorrow i mean to me 2029 is september i mean whatever i'm buying it I'm leaving it there.

42:03So, um, so here's the thing before I shut up. Um, despite this really strong, creative track record, 11 bits share price has been slammed. So I say to our listeners, just look at 11 bits share price on Warsaw and Berlin, and you'll see a cliff edge. And that's because they had a$12 million you, uh, write off by canceling a project called project date with a whole bunch of layoffs now no point in even describing what project eight is because they can't so but what happened was the market didn't like it shareholders didn't like it they dumped the stock uh they had publishing misses which is kind of par for course in in the gaming industry like grand theft auto 6 has just taken like forever it just that whenever they say it's coming out you can just it's like the irish children's hospital only irish people get that So it's publishing this.

42:56So games like the Invincible have underperformed and then revenue is lumpy. So all in all, you know, we're looking at a business that's been maligned and mid cap gaming stocks have also been under pressure globally. So all of these issues are temporary and have created a much cheaper entry point for investors who believe in Frostpunk 2 and that the console downloadable content cycle is going to be good for it and the alters long term potential, which, as I said, I most certainly believe in. And so what I'll just wrap up before I hand back to you, Mike, is that the base case revenue forecast that I've scribbled down here.

43:37And you know me, I don't generally put, I did a master's in finance years ago. We're doing discount cash flows and this, that and the other and putting on price targets. And the one thing that everybody, if you keep your discounted cash flows for years and do loads of them, they'll uniformly all have one attribute you are wrong in all of them. And there's a good argument to say, well, you should do one anyway, and that's fine. But if you look at the things we speak about week in, week out, the right side of the brain, the qualitative judgment that you make on a business is more often going to be right than the quantitative where you do a DCF.

44:13But anyway, but the base case is I reckon when it comes back to 11-bit that they're going to do about 40 million in revenue this year between Frostpunk 2 and PC sales and the Alters launch. They're going to do about 40 million in revenue this year. Easy number to remember. next year i reckon they're going to do about 55 to 60 million in revenue uh because it's going to be the first full year where frost punk 2 was out on all platforms with the downloadable content and i reckon they'll do kind of the same ballpark the year after around 50 to 55 million as the franchise tails off and they're kind of gearing up for new releases and with margins historically at around 30 35 uh 2026 earnings profit could hit about 17 18 million dollars so if we apply a 15 x pe which is pretty much reasonable for the industry it values the business at 264 million dollars which is more than double today's market cap which is why i believe it's going to be a two-bagger any questions yeah i mean it's funny these game developers we've seen a lot of them um you know how dependent they become on singular titles like isn't it we've even seen that at take two scale yes and so when you shrink that down to 11 bit studio scale it becomes even more and more pronounced how dependent they are on uh their their big names and like say i'm just looking like you know if frostbite frost what is it frost frost two yeah frostbunk two comes in and not even like does it like absolutely like you know it was a profitable business but didn't reach the heights of say prospect one and it's like the house is on fire do you know what i mean and then yeah and then you bring in something like the the next uh kind of successful franchise potentially and alters and it's like okay now here's this big potential turnaround again so that's what you're saying that is the white white hot risk for sure but yeah you can see you can very much see the uh the route to success as well yeah and i think that's important for very risky stocks is like yes i'm very aware of the risk and like i've seen the risk play out you know the stock is down huge in the last year but i have a very clear line of what success looks like as well do you know what i mean yeah i do so i think it's i think it's a very fleshed out investment pitch for something that is incredibly risky but you've given your clear reasons why um and you've explained say why the company has fallen and maybe maybe there's a turnaround in terms of sentiment on certain titles as well so like frostpunk 2 may be disappointed but how does the console release go here's altars now exactly so yeah i think it's i think it's an interesting uh it's an interesting pitch you know we went very different uh directions for this episode i was like 150 million 150 billion dollar hottest stock in the market to a tiny microcap in poland that no one's ever heard of i can think of at least three podcast listeners who could buy that whole company and not feel it you know like Like, I mean, that's how small it is.

47:34But of all the things I said, and I spoke about why their stock was clobbered and the new titles they've got and the franchise that they're building with Frostpunk 2 and the altars and all that stuff. The most important thing I said was the reviews because that's really all that matters. Because people who buy games before they drop 50, 60,$100 jump on to see what do their fellow gamers think. And those reviews are absolutely glowing for the two titles that are just coming out of the traps now. And for that reason, I believe they'll meet their sales targets. And I wouldn't say for no other reason, but that is the lion's share of where I believe my belief is coming from.