by kelpiecapital

Price – $1.18      Market Cap – $33m

Net Cash on B/S – $1.84


Gravity Co is a South Korean video game corporation primarily known for the development of the Multiplayer Online Role-Playing Game (MORPG) Ragnarok Onlinewhich had close to 40 million users at one point according to the company. The Group’s principal activity is to develop, distribute and publish online games and software. It is also involved in mobile game development, animation, and licensing the merchandizing of character-related products based on its online games. Its principal products are Ragnarok Online and R.O.S.E. Online.


Our Margin of Safety

Downside protection from

(1) $1.84 of net cash per share, you can buy a dollar of net cash for $0.64.

(2) A business that is profitable and cash flow positive; $0.08 of earnings last quarter and $0.06 this quarter. Imagine GRVY makes $0.06 for the next 2 quarters and deserves a lowly 10x earnings multiple = $2.60 stock price excluding the cash and assets.

(3) Possibility of a bid by the majority shareholder to buy out the minority holders (although Gung Ho could have done this just about for free at any point over the last 2 years given the cash on the balance sheet.)

(4) High return-on-capital business with favourable long-term growth prospects.

(5) Income and book value has grown year over year since 2005.



Gravity listed on Nasdaq on the back of the hugely successful game Ragnarok Online, one of Asia’s first and most popular MMORPGs. The company raised $71 million at $13.50 per share in 2005 (another example of a terrible IPO to participate in!).

We wouldn’t be discussing Gravity here if everything had gone as laid out in the IPO prospectus in 2005. The highly anticipated release of Ragnarok Online 2, the sequel to the company’s best-selling game, has been delayed repeatedly, causing revenue to decline and development costs to increase. Shareholders have been repeatedly disappointed and the uncertainty regarding the future of Ragnarok 2 has exasperated everyone involved. The deteriorating fundamentals led investors to scrutinize other aspects of Gravity, including the company’s lacking corporate governance under Korean laws and even fraud and embezzlements committed by former management.  U.S. activist hedge funds Ramius Capital and Moon Capital sued the company in South Korean courts and won certain concessions on governance matters.


The Business Model

MMORPG developers receive royalties and fees from users for the use of the game servers, platforms and software. Customers can either pay per hour or per day which is the traditional model or alternatively now users can pay more money for in-game points which allow gamers to advance within the game at a faster pace.

Most MMORPG are “Free to Play” now. What this means is that users must pay money incrementally to advance within the game. Weapons, charms, clothes, food, presents can all be chargeable items and can be priced differently to distinguish between users status or allegiances.  This in the long run should create more revenues as it allows them to extract maximum potential revenue from each gamer. It is possible that someone who was paying for a monthly subscription but is a seriously heavy user is now paying a multiple of their subscription rate. Once a gamer gets hooked they are likely to be very price insensitive for the best “power ups”.


The Size of the Addressable Market

The worldwide online (PC) gaming industry has grown about 10% a year from 2005-present (primarily from growth in Asia). It also doesn’t seem unreasonable that this growth rate can continue for another 5-10 years.

The Ragnarok Website claims 40 million users for the first game. In Asia, multiplayer games are HUGE. I know this from my time living in Singapore, imagine 5 storey arcades filled with boys AND girls all gaming furiously. See below a clip from the Original 9 year old Ragnarok which was posted only 3 years ago which demonstrates the staying power/enduring addictiveness of the Ragnarok brand. 700,000 views too!

Ragnarok grew rapidly in popularity and reached peak subscribers in March 2005. It has been the top online (PC) game in Japan since 2005. Ragnarok is also reported to be the top online game in Taiwan, Thailand, Malaysia and Singapore and is currently offered in 38 countries and 14 languages. As an indication of the excitement (which admittedly must be waning!) around Ragnarok 2, YouTube has 2,800 trailers and clips from the beta games.  Considering that YouTube is more US/Western oriented and Ragnarok is primarily an Asian phenomenon, this seems to indicate good buzz.

Ragnarok One is now available on mobile phones – which should allow an extra few million dollars of revenue per year possibly. Conveniently, this may also broaden the revenue base away from the reliance on traditional avenues.



  1. Requiem – 5% of total revenue and revenues continue to rise.
  2. ROSE Online – 1% of revenues
  3. Emil Chronicle Online – Over 1% of revenues
  4. Estar (tentative title) – In development
  5. Canaan – Recently went through beta testing.
  6. NeoCyon – Various mobile games are released through this subsidiary. Revenues are increasing and multiple news reports have come out of new mobile games. The 2009 revenues were $7 million.
  7. HAVE Online – Entered into publishing agreement with online game developer to publish game in Korea and Japan. Expected release was third quarter 2010.
  8. Dragon Saga – Purchased over  50% from Barunson Interactive. This game was launched in late 2010 with excellent reviews.
  9. War of Gods – Entered into publishing agreement with another company to publish in Korea in late 2010.
  10. Weapons of Gods – Entered into publishing agreement with another company to publish in Korea. Expected release is third quarter of 2011.



With regards to this pipeline of games I think it’s best to use a metaphor. These 10 games will not all become a success but with 10 “shots on goal” we have to hope that if our developers have any skills and know their market; as the success of Ragnarok demonstrated they do; then they will hopefully score a hit with at least one of them. I don’t think there is any merit in trying to guesstimate which of these games will become a hit and which won’t. Remember when the Crazy Frog went viral? I would suggest that gaming and online content is a Black Swan rich environment.

This is an industry where the upside is exponential too; if the creators of Farmville can create games worth $9bn, Tencent worth $26bn and Facebook might be worth $80bn then I don’t think it’s an unimaginable possibility that Gravity can create an online game worth $60m or about 2x the current market cap!

If something, anything good happens here, the stock could explode upwards. Nevermind arguing what multiple Mr. Market should pay for Gravity. The company still trades for less than net cash! There is extreme optionality in the stock at current levels in my opinion, an attractive risk/reward payoff.

I view this holding as a “statistical position” a small, free option on a positive non-correlated outcome. If nothing comes of it, I will barely feel it; if something good happens it may have a significant impact.


The Never Ending Beta Testing of Ragnarok 2

Ragnarok Online was introduced in 2001, where players participate with others in a world based on Norse mythology where the fight monsters and achieve great powers.  10 years later after

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