Some Games Are Over
While we are not public equity investors, we follow major listed companies as live case studies in capital allocation. Recently, the stark performance divergence among video game publishers has been particularly instructive. At the sector level, the industry has returned to modest growth as the post-pandemic reset concludes. However, these gains have not been evenly distributed. While gaming indices rose ~25% in 2025, several constituents suffered a disastrous year.
Ubisoft and Embracer have been the primary outliers. Both companies saw their shares approximately halve over the prior year - now down ~90% from their 2020-2021 peaks. Their aggressive pandemic-era capital deployment met a rapid shift in investor risk tolerance. Both scaled pipelines and acquisitions on assumptions of sustained peak demand, only to confront a perfect storm of delays, cancellations, and underperforming releases.
The resulting operational resets have been massive. Embracer reduced headcount by over 4,500 (~40% of peak) and initiated a formal breakup of the group into three separate entities, while incurring billions in impairments to unwind its acquisition-led strategy. This retreat was triggered by the collapse of a key $2B strategic deal and the realization that its rapid roll-up created immense organizational complexity and leverage without the near-term cash flow to support it.
Ubisoft’s challenges are equally structural. Following six game cancellations and delays to core franchises like Assassin’s Creed, the company initiated a €500M cost-cutting program (~30% reduction). Speculation regarding a potential take-private or spin-off of core assets has further underscored the need for a simplified corporate structure. These moves acknowledge that prior capital allocation relied on a level of hit predictability that proved unrealistic in a market with such fragmented attention.
A primary takeaway here is the asymmetric risk profile of AAA gaming for companies without massive balance sheets. Development cycles often exceed five years, capital intensity is extreme, and returns are concentrated in a handful of franchises. When execution falters, valuation compression is severe because the market reprices multiple years of expected cash flows simultaneously. This was further exacerbated by the elevated operating and financial leverage both firms carried.
Whether these valuations are currently oversold depends on execution credibility. The market isn't concerned with a long-term decline in gaming demand, as engagement remains robust, but rather a lack of confidence in production discipline. The announced restructurings are intended to address these concerns by simplifying operations, reducing leverage, and improving cash conversion.