Embracer Group: The Value of Great Games

Embracer Group is a global gaming and entertainment company that develops, publishes, and distributes games across PC, console, mobile, and virtual reality. Known for franchises such as The Lord of the Rings, Tomb Raider, Metro, Kingdom Come, and Dead Island, the company combines valuable intellectual property with experienced development studios and specialized entertainment businesses. Following years of rapid expansion, Embracer is becoming a more focused and disciplined company, while the planned separation of Fellowship Entertainment will create two distinct businesses with different opportunities for long term growth and value creation. The question remains: Does this gaming and entertainment group deserve a spot in your portfolio?

This is not financial advice. I am not a financial advisor, and I publish these analyses to document my own research and share my thoughts with readers and followers. If you are considering investing in any of the companies or ideas discussed, you should always do your own research and, if necessary, consult a qualified financial professional. All investing involves risk, and you may lose some or all of the money you invest.

For full disclosure, I do not own shares in Embracer Group at the time of writing this analysis. I publicly share my investment portfolio, including all of my current holdings and changes I make over time. If you are interested in seeing what I currently invest in and learning how you can follow or copy my portfolio, you can read more here.

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The Business

Embracer Group is a Swedish gaming and entertainment group built around a collection of entrepreneurial businesses, intellectual property, game development studios, publishers, and specialist entertainment companies. The company has grown significantly through acquisitions since its IPO in 2016 and today controls a portfolio of more than 400 owned or controlled franchises, operates 53 internal game development studios, and engages more than 6.000 people across nearly 30 countries. Unlike a traditional gaming company where most strategic and operational decisions are made centrally, Embracer has historically operated through a decentralized model. Its individual businesses are given considerable autonomy to preserve their entrepreneurial cultures, creative identities, and relationships with their communities, while the group provides governance, financial oversight, capital allocation, and other forms of support. This means that Embracer is better understood as an ecosystem of gaming and entertainment businesses than as a single game developer. Many of these businesses have operated for decades and have developed expertise in particular niches of the entertainment industry. However, the Embracer investors know today is undergoing another significant transformation. Following the spin-offs of board game company Asmodee and Coffee Stain Group, Embracer intends to spin off Fellowship Entertainment as a separately listed company in 2027. Ahead of the separation, the company will report through two business segments called Fellowship Entertainment and Embracer. The two businesses will have fundamentally different strategies. Fellowship Entertainment will contain many of the group's most strategically important intellectual properties and development studios and is intended to become an IP-led entertainment company. It will be home to franchises including The Lord of the Rings, The Hobbit, Tomb Raider, Metro, Kingdom Come, Dead Island, Remnant, and Darksiders, together with studios and companies such as 4A Games, Crystal Dynamics, Eidos-Montréal, Warhorse Studios, Dambuster Studios, Gunfire Games, and Middle-earth Enterprises. The business will operate through Development & Publishing and Licensing. Development & Publishing will create and publish games around both established and new intellectual properties, while Licensing will seek to monetize its franchises without necessarily funding the underlying products itself. The Lord of the Rings is particularly important because Embracer controls the worldwide rights to develop films, video games, board games, merchandise, theme parks, stage productions, and various other commercial activities based on The Lord of the Rings and The Hobbit literary works. This creates opportunities to generate licensing revenue from external companies while expanding the reach of the franchise across different forms of entertainment. Management ultimately wants licensing to become a larger source of recurring and high-margin revenue, reducing some of the dependence on the inherently unpredictable economics of developing major video games. The remaining Embracer business will be quite different. Rather than being centered around a handful of globally important franchises, it will remain a mainly decentralized collection of entrepreneurially managed gaming and entertainment businesses operating in specialized niches. These include THQ Nordic, DECA Games, Aspyr, Limited Run Games, Milestone, Tripwire Interactive, Vertigo Games, PLAION Partners, and PLAION Pictures. Its activities will span PC and console games, mobile games, game and film distribution, retro gaming, remakes and remasters, virtual reality, merchandise, and other entertainment services. THQ Nordic and its studios develop and publish games including Gothic, Titan Quest, Wreckfest, MX vs. ATV, and SpongeBob titles, while Tripwire Interactive is known for the Killing Floor franchise. Milestone has specialized in racing games for roughly three decades, while Vertigo Games has established a strong position in virtual reality gaming. Aspyr specializes in bringing established games to modern platforms through ports and remasters, and DECA Games focuses primarily on mobile games with long product lives and engaged communities. Limited Run Games occupies another specialized niche by publishing physical and collector editions of games that would otherwise primarily be distributed digitally, particularly titles appealing to dedicated and retro gaming audiences. Embracer also has meaningful operations outside game development. PLAION Partners provides physical publishing and distribution services to console manufacturers and third-party video game companies, meaning part of its revenue is generated regardless of the success of Embracer's own game releases. PLAION Pictures similarly operates a large European film distribution business, distributing movies for major Hollywood partners across several markets while also monetizing its own catalog through physical and digital channels. These activities provide a degree of diversification and recurring revenue that reduces the group's dependence on the timing and commercial success of individual game releases. The future Embracer is therefore intended to resemble a collection of specialist businesses rather than a conventional gaming publisher. Management plans to maintain entrepreneurial autonomy while imposing tighter financial controls, stronger governance, and more disciplined capital allocation at the group level. Following several years of restructuring, studio closures, divestments, and cost reductions, management also intends to become much more selective with acquisitions. Rather than returning to the aggressive acquisition strategy that characterized Embracer's earlier years, future M&A is expected to consist primarily of smaller opportunistic bolt-on acquisitions in niches where the group already has expertise, including mobile gaming, distribution, retro gaming, films, remakes, and remasters. These acquisitions are expected to be primarily financed through internally generated cash flow and proceeds from divestments. Businesses may also be sold when management believes capital can be redeployed at higher returns elsewhere. In this sense, the future Embracer is intended to combine elements of a decentralized holding company with the specialist knowledge and intellectual property of a gaming and entertainment group. Embracer Group's competitive moat is primarily built around its intellectual property, specialized industry expertise, established gaming communities, and positions in several difficult-to-replicate entertainment niches. The most obvious competitive advantage is the company's extensive intellectual property portfolio. Successful video game franchises can become extremely valuable because players already understand the universe, recognize the characters, and have an emotional connection with previous games. This reduces some of the uncertainty associated with attracting an audience compared with launching an entirely unknown franchise. Properties such as The Lord of the Rings, Tomb Raider, Metro, Kingdom Come, Gothic, Killing Floor, Titan Quest, and Wreckfest have established audiences that can support sequels, remakes, remasters, licensing agreements, merchandise, and potentially other entertainment formats for many years. Intellectual property can also become more valuable as its ecosystem expands. A successful game can increase interest in merchandise or other entertainment products, while films, television series, books, and licensed products can introduce new consumers to a franchise and subsequently increase demand for games. This is particularly powerful within Fellowship Entertainment, where ownership of properties such as The Lord of the Rings and Tomb Raider provides opportunities to monetize the same underlying intellectual property across multiple categories without Embracer having to develop every product itself. Licensing can therefore provide attractive economics because external partners contribute much of the development capital while the intellectual property owner receives a share of the resulting economics. However, the strength of this moat varies considerably across Embracer's portfolio. The Lord of the Rings has extraordinary global recognition, while many of the group's smaller franchises have significantly narrower audiences and should not be considered comparable competitive assets. Another competitive advantage comes from the accumulated expertise within Embracer's specialist businesses. Several companies within the group have operated successfully for decades and have developed capabilities that are difficult to reproduce quickly. Milestone has spent around 30 years developing racing games, Aspyr has built expertise in porting and remastering established games for modern platforms, DECA specializes in operating mobile games with long product lives, Vertigo Games specializes in virtual reality, and Limited Run Games has built a recognizable position serving collectors and enthusiasts of physical and retro games. PLAION has similarly developed extensive relationships and infrastructure across physical game and film distribution in Europe. None of these businesses is protected from competition, but years of accumulated knowledge, industry relationships, technical expertise, catalogs, and customer communities can make them difficult for new competitors to replicate. This is particularly relevant in niche markets where the total opportunity may be too small to attract the largest gaming companies but sufficiently large for a focused specialist to build an attractive business. The communities surrounding Embracer's games provide another important advantage. Gaming differs from many consumer industries because successful franchises can develop highly engaged communities that remain active for many years. Players invest considerable amounts of time in games and often form emotional attachments to their characters, worlds, and communities. This creates a valuable installed audience for sequels, downloadable content, remasters, and other products associated with the franchise. Embracer's philosophy of keeping studios close to their gaming communities can strengthen this relationship because developers receive direct feedback about what players value. Long-running franchises such as Gothic, Killing Floor, Wreckfest, Titan Quest, and MX vs. ATV demonstrate how intellectual property can remain commercially relevant across multiple generations of hardware and changing consumer preferences. DECA's strategy of operating older mobile games for extended periods is another example of how established communities can generate revenue long after the initial launch. Embracer's broad catalog also provides an advantage because video games can continue generating revenue for many years after their original development costs have been incurred. Digital distribution has extended the commercial life of older games because titles can remain available indefinitely through platforms such as Steam, PlayStation, Xbox, Apple App Store, and Google Play. Older games can also be repackaged, remastered, ported to new platforms, bundled, or sold during promotions, allowing Embracer to repeatedly monetize intellectual property created years earlier. The company's specialist capabilities in remakes, remasters, ports, and retro gaming make this particularly relevant. A deep catalog therefore provides both ongoing cash generation and a pipeline of existing intellectual property that can potentially be revived without taking the same creative risk involved in establishing completely new franchises. The decentralized operating model can further strengthen these advantages, although I would consider it more of an organizational advantage than a true moat. Game development is a creative business where talented teams and experienced studio leaders are extremely important. Allowing entrepreneurs and studio management teams to retain autonomy can help preserve the culture and specialized knowledge that made an acquired company successful in the first place. Rather than attempting to operate dozens of fundamentally different creative businesses from Karlstad, Embracer allows decisions to remain close to customers, developers, and gaming communities. At the same time, the group can provide capital, governance, publishing capabilities, distribution, and financial oversight. If executed successfully, this structure could make Embracer an attractive long-term home for gaming entrepreneurs who want access to a larger organization without surrendering control over day-to-day operations. This could eventually become an advantage when competing for acquisitions, particularly if Embracer develops a reputation for allowing successful entrepreneurs to continue running their businesses independently. However, Embracer's history demonstrates why decentralization alone cannot be considered a moat. The company's previous acquisition strategy expanded much faster than its financial and governance structures could comfortably support, ultimately contributing to a painful restructuring involving divestments, studio closures, layoffs, and substantial write-downs. The competitive advantage therefore depends on combining entrepreneurial freedom with considerably stronger capital discipline than Embracer demonstrated during its period of rapid expansion. Management now emphasizes tighter cost control, group-level accountability, stronger cash conversion, and selective investment based on expected returns. Future acquisitions are also expected to focus mainly on businesses adjacent to areas where Embracer already possesses expertise rather than expansion for its own sake. If management can demonstrate this discipline over many years, the decentralized structure and reputation as a permanent home for entrepreneurs could become considerably more valuable. Overall, Embracer's moat should therefore be viewed as a collection of smaller advantages rather than one dominant competitive barrier. Its strongest franchises benefit from brand recognition, loyal communities, and opportunities for repeated monetization, while its specialist businesses possess decades of experience in niches such as racing games, mobile game management, VR, retro gaming, remasters, and physical and digital distribution. Its catalogs provide long-tail revenue and opportunities to repeatedly revive existing intellectual property, while its decentralized structure can preserve entrepreneurial cultures and specialist expertise. These advantages make parts of Embracer difficult to replicate, but the gaming industry remains highly competitive and unpredictable, and even established franchises can produce unsuccessful releases. The durability of Embracer's moat therefore ultimately depends on its ability to consistently allocate capital toward its strongest intellectual properties and businesses, retain talented creative teams, maintain engaged communities, and avoid repeating the capital allocation mistakes that accompanied its previous period of rapid acquisition-led growth.

Management

Phil Rogers serves as the CEO of Embracer Group, a role he assumed on August 1, 2025, when founder Lars Wingefors stepped down as CEO and became Executive Chair of the Board. Phil Rogers brings more than two decades of experience in the video game industry, spanning game development, publishing, intellectual property management, and the leadership of large international gaming organizations. His appointment represented an important change for Embracer Group following several difficult years in which the company went through a major restructuring, reduced debt, closed and divested businesses, and began separating the former group into more focused standalone companies. Before becoming CEO of Embracer Group, Phil Rogers led the Middle-earth & Friends business within the group and served as CEO of Crystal Dynamics and Eidos. Phil Rogers also became increasingly involved in the strategy of the wider group during its restructuring, with a particular focus on improving execution and concentrating resources around the intellectual properties and businesses where Embracer believed it had the strongest opportunities. Earlier in his career, Phil Rogers became CEO of Eidos in 2008 before leading the Western operations of Square Enix from 2009 until 2022. This gave Phil Rogers extensive experience managing game development studios, publishers, and some of the industry's best known franchises across Europe and North America. During this period, Phil Rogers was involved in the management of franchises including Tomb Raider, Deus Ex, and several other major properties. The successful reboot of Tomb Raider beginning in 2013 was particularly important, helping revitalize one of the industry's most recognizable franchises and demonstrating the potential of investing behind established intellectual property while introducing it to a new generation of players. Phil Rogers remained with Crystal Dynamics and Eidos after Embracer acquired the businesses from Square Enix in 2022 and subsequently became an increasingly important executive within the wider Embracer organization. Phil Rogers holds a BSc degree in Mathematics from the University of Leeds and has spent his career combining the creative characteristics of the gaming industry with the commercial and financial requirements of operating large businesses. His experience is particularly relevant to Embracer because game development requires management to balance creative freedom with financial discipline. Studios need sufficient independence and time to create high quality games, while management must determine which projects deserve capital and ensure that development budgets can generate attractive returns. Since becoming CEO, Phil Rogers has emphasized greater focus, tighter cost control, improved execution, stronger cash generation, and more disciplined capital allocation. This represents an important change from the period when Embracer expanded rapidly through acquisitions and invested heavily across a very broad portfolio of projects. Rather than spreading capital across as many opportunities as possible, the strategy increasingly focuses resources on businesses and intellectual properties where management has the greatest conviction and where the potential returns justify the investment. Phil Rogers has also emphasized preserving entrepreneurial and creative autonomy within the organization. Embracer consists of businesses with different cultures, audiences, and areas of expertise, and Phil Rogers believes these companies should continue to make many decisions close to their studios and communities rather than being managed centrally. At the same time, this autonomy is being combined with stronger accountability, governance, financial controls, and cost discipline at the group level. This balance between creative independence and financial accountability will be important in determining whether Embracer can avoid repeating some of the mistakes made during its previous period of rapid expansion. However, Phil Rogers' role is also transitional because Embracer Group is preparing for another major structural change. The company intends to spin off Fellowship Entertainment as a separately listed company in 2027. Until the separation, Phil Rogers will continue to lead Embracer Group while also preparing Fellowship Entertainment to operate independently. When the spin-off is completed, Phil Rogers is expected to become CEO of Fellowship Entertainment rather than remaining with the future Embracer business. Founder and Executive Chair Lars Wingefors has highlighted Phil Rogers' contribution to increasing focus, execution, and cost discipline and views Phil Rogers as the natural leader of Fellowship Entertainment. Under Phil Rogers' leadership, Fellowship Entertainment is intended to become a more unified developer and publisher rather than simply a collection of separate studios. The strategy is to combine strong creative teams with valuable intellectual properties, improved publishing capabilities, and a licensing platform that can expand over time while continuing to preserve creative autonomy within individual studios. This makes Phil Rogers' previous experience particularly relevant to the company he is expected to lead. Having spent much of his career managing Western game studios and established franchises, Phil Rogers has experience with many of the challenges Fellowship Entertainment will face, including deciding where to allocate large development budgets, managing creative organizations, maintaining established franchises, and expanding intellectual property beyond individual game releases. The leadership situation is therefore important for investors to understand when evaluating Embracer Group today. Phil Rogers is currently responsible for the entire group, but his longer term role will be leading Fellowship Entertainment after the planned separation. Embracer has initiated a recruitment process for a new CEO and CFO for the remaining Embracer business, with appointments expected well ahead of the spin-off. Investors considering the future Embracer will therefore eventually need to evaluate a different management team, while investors considering Fellowship Entertainment will be investing alongside Phil Rogers and the leadership team currently responsible for much of Embracer Group's transformation. Given Phil Rogers' extensive experience in the gaming industry, his history of managing major franchises and development studios, and his increasing emphasis on disciplined capital allocation and execution, Phil Rogers appears well suited to lead Fellowship Entertainment as it becomes an independent company. The most important test will be whether Phil Rogers can translate the value of Fellowship Entertainment's strong intellectual property portfolio into consistent game releases, growing licensing revenue, stronger cash generation, and attractive long term returns on the substantial capital required to develop major games.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Embracer Group does not meet this requirement, as ROIC has been low for most of the past eight years. Returns were considerably stronger during the company's earlier years when Embracer, then operating primarily under the THQ Nordic name, was a much smaller and more focused business. The company had a relatively limited amount of capital invested in the business and generated healthy profits compared with that investment. This changed as Embracer entered a period of very rapid expansion through acquisitions. The company acquired dozens of game developers, publishers, intellectual properties, and other entertainment businesses, which meant that the amount of money invested in the group increased dramatically. The main problem was that profits did not increase at the same pace. Embracer was investing large amounts of money in businesses and intellectual properties that management expected would generate much higher profits in the future. When those profits did not arrive quickly enough, ROIC naturally declined. Acquisitions were not the only reason for the deterioration. Embracer also invested heavily in developing new games, and the returns from these investments varied considerably. Game development can be challenging from a capital allocation perspective because a company may spend large amounts of money for several years before a game generates any revenue. A successful game can generate excellent returns, while a delayed or unsuccessful game can result in years of spending with little to show for it. As Embracer expanded, the number of development projects and employees increased significantly, while money was spread across a very broad portfolio of both established and less proven intellectual properties. This made it increasingly difficult for the company to turn its growing investments into higher profits and cash flow. Management's own data illustrates this problem. Across 103 game projects released between 2016 and 2025, representing approximately SEK 10,2 billion of investment, Embracer generated an average game development return of 2,1 times the original investment. However, there was a large difference depending on where the money was invested. Games based on what Embracer defines as core intellectual properties generated an average return of 3,1 times the investment, while non core intellectual properties generated only 1,6 times. This suggests that the problem was not simply that Embracer was spending too much on game development. It was also spending too much money on projects outside the franchises where it had the strongest positions and the best chances of commercial success. The situation became more difficult when the gaming market weakened following the pandemic and financing became more expensive. Embracer had built a large organization and development pipeline around continued growth, including expectations for a major strategic partnership that ultimately fell through. The company was left with a large cost base, many development projects, and investments that were not generating enough profits. This led to a major restructuring that included studio closures, cancelled projects, workforce reductions, and the sale of several businesses. Embracer has also been forced to reduce the reported value of several businesses and assets because they were no longer expected to be worth as much as previously thought. hese reductions do not represent money leaving the company today, but they are still important when looking at historical ROIC because they show that some of the money Embracer invested in previous years did not create the value management originally expected. The encouraging development is that Embracer has now spent several years addressing many of the problems that contributed to its poor returns. The company has sold businesses, closed studios, cancelled projects, reduced its workforce, lowered costs, and become much more selective about where it invests its money. Management has also sold businesses that were losing money, allowing more resources to be directed toward areas where the company believes it can earn better returns. One of the most important changes is the increasing focus on Embracer's strongest intellectual properties. Core IP represented only around 20% of game development investment in fiscal year 2024/25, but management expected this to increase to approximately 40% in fiscal year 2025/26 and has indicated that it could eventually reach around 80%. Given that games based on core IP have historically generated a return of 3.1 times the investment compared with only 1,6 times for non core IP, this change could have a meaningful impact on returns if the same pattern continues. Instead of spreading money across a very large number of projects, Embracer is increasingly concentrating its investments on franchises where it already has established audiences, experienced development teams, and a history of attractive returns. The planned separation of Fellowship Entertainment from Embracer could also help improve capital allocation. Fellowship Entertainment will contain many of the group's largest and most important franchises, including The Lord of the Rings, Tomb Raider, Metro, Kingdom Come, and Dead Island. This should allow management to focus its investments on a smaller collection of high quality intellectual properties. The remaining Embracer will operate with a leaner structure and focus on entrepreneurially managed specialist businesses, while future acquisitions are expected to be more selective and primarily financed through cash generated by the company and money received from selling other businesses. This is very different from the aggressive acquisition strategy that contributed to the decline in ROIC during the previous decade. Looking ahead, I therefore believe there are good reasons to expect Embracer's ROIC to improve, but it is still too early to say that the problem has been solved. The company has a history of poor capital allocation, and developing games will always involve uncertainty. Large amounts of money often need to be invested several years before management knows whether a game will become commercially successful. Embracer is now operating with fewer projects, a leaner cost structure, a greater focus on cash generation, and a much larger share of development spending directed toward intellectual properties that have historically generated better returns. If management maintains this discipline and avoids returning to aggressive acquisition driven growth, ROIC should gradually improve. Whether Embracer can eventually generate ROIC above my preferred 10% level consistently remains uncertain, but the conditions for improving returns on capital appear much better than they were during the company's period of rapid expansion.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Embracer Group's equity increased significantly during the first seven years shown above before declining sharply over the past three years. The strong growth during the earlier period coincided with Embracer's rapid expansion through acquisitions. The company acquired dozens of game developers, publishers, intellectual properties, and other entertainment businesses, transforming Embracer from a relatively small gaming company into a large global group. Many acquisitions were financed partly through newly issued shares, while Embracer also raised significant amounts of capital from investors to fund its expansion. This helped equity grow rapidly as more businesses and assets were added to the group. However, the quality of this growth needs some context. Much of the increase was connected to acquisitions and capital raised from investors rather than profits generated and retained by the existing businesses. Embracer was effectively using cash and shares to acquire new companies, intellectual properties, and development studios. Whether this created lasting shareholder value ultimately depended on the profits and cash flow these investments could generate. This became increasingly problematic as Embracer grew. Some acquired businesses and game development projects did not perform as management originally expected, while the company had built a large organization with high costs and a broad development pipeline. When the expected profits failed to arrive, Embracer had to recognize that some of the businesses and assets it had acquired were worth less than previously thought. These reductions in value lower equity and have been an important reason for the decline over the past three years. In fiscal year 2025/26 alone, Embracer reduced the reported value of several assets by approximately SEK 7.4 billion. These reductions do not mean that the same amount of cash left the company during the year. Much of the money had been invested years earlier through acquisitions and game development. Instead, they show that some of those previous investments did not create as much value as management originally expected. The decline in equity therefore partly reflects the consequences of the aggressive capital allocation strategy that Embracer followed during its period of rapid expansion. Another important reason for the recent decline is the transformation of Embracer into several independent companies. Asmodee was spun off and distributed to Embracer shareholders in 2025, while Coffee Stain Group was spun off later that year. When a business is separated from Embracer, the assets belonging to that business leave Embracer, which naturally reduces equity. However, this is very different from losing the same amount of value through an unsuccessful investment. Embracer shareholders received shares in the newly independent companies, meaning that part of the value previously contained within Embracer was transferred directly to shareholders through their ownership of Asmodee and Coffee Stain Group. This means that the recent decline in equity should not be viewed entirely as value destruction. Divestments have also contributed to the shrinking size of the group. Embracer has sold businesses including Gearbox, Saber Interactive, and Easybrain as part of its effort to reduce debt, simplify the organization, and focus its resources on businesses and intellectual properties where management believes it can generate better returns. Today's Embracer is therefore deliberately becoming a smaller and more focused company than the group that existed at the peak of its acquisition strategy. The decline in equity over the past three years consequently has several very different causes. Part of it reflects genuine value destruction from acquisitions and investments that failed to meet expectations, while another part reflects businesses being sold or distributed to shareholders as Embracer restructures the group. Looking ahead, I would not expect equity to immediately return to its previous peak. In fact, the planned spin off of Fellowship Entertainment in 2027 is likely to cause another significant reduction in Embracer's reported equity. Fellowship Entertainment will contain many of the group's most important studios and intellectual properties, including The Lord of the Rings, Tomb Raider, Metro, Kingdom Come, and Dead Island. When Fellowship Entertainment is separated from Embracer, the assets belonging to Fellowship Entertainment will leave Embracer. However, existing Embracer shareholders are expected to receive shares in Fellowship Entertainment, meaning the decline in Embracer's equity should not by itself be viewed as destruction of shareholder value. Investors will simply own their interests through two separate companies instead of one. Share repurchases could also limit future growth in equity. Embracer has started returning capital to shareholders through share buybacks, and when a company repurchases its own shares, the cash used for those purchases reduces equity. More importantly, the way Embracer builds equity in the future should be very different from the way it did during its period of rapid expansion. Management is now focusing on fewer projects, stronger intellectual properties, lower costs, improved cash generation, and more disciplined capital allocation. Future acquisitions are expected to be more selective and primarily financed through cash generated by the business and proceeds from divestments rather than the aggressive use of new capital that characterized the previous strategy. If this approach succeeds, future growth in equity should increasingly come from profitable operations and retained earnings rather than rapid acquisition driven expansion. Overall, I would therefore not expect a smooth recovery in Embracer's equity in the near term. The Fellowship Entertainment spin off is likely to affect the numbers again, while further divestments and share repurchases could also reduce equity. However, these changes should not automatically be viewed negatively. What matters more is whether the businesses ultimately owned by shareholders can generate sustainable profits and cash flow and reinvest that money at attractive returns. For this reason, Embracer's historical equity growth needs to be viewed with some caution in both directions. The very strong growth during the company's acquisition period was not as impressive as it initially appears because much of it was supported by acquisitions and capital raised from investors, while the recent decline is not quite as concerning as it appears because part of it reflects businesses being separated and distributed directly to shareholders. Once the restructuring and planned spin off are completed, the ability of the future Embracer and Fellowship Entertainment to grow equity through sustainable profits and disciplined capital allocation will be much more important than whether Embracer's equity returns to its previous level.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Embracer Group has generated positive free cash flow throughout the period shown above, although both free cash flow and the free cash flow margin have fluctuated considerably from year to year. This is partly explained by the nature of the gaming industry. Developing games requires significant investment before a product is released, while much of the revenue and cash flow arrives after launch. This means that years with heavy development spending can produce weaker free cash flow, while successful releases can result in much stronger cash generation. Once a game has been developed, it can continue generating revenue for many years with much lower additional investment. Embracer owns a large catalog of games that continue to generate sales through digital platforms, promotions, downloadable content, ports, remasters, and releases on new platforms. These catalog sales can be particularly attractive from a cash flow perspective because most of the original development costs have already been paid. Embracer also generates cash from businesses outside traditional game development. Activities such as mobile games, physical game distribution, film distribution, licensing, and other entertainment services can generate revenue independently of the company's major new game releases. This diversification helps reduce some of the dependence on individual game launches, although the timing and success of new releases remain important for overall cash generation. Embracer's free cash flow reached its highest levels during the period when the group was considerably larger and benefited from strong contributions from acquired businesses and successful games. However, free cash flow fell sharply in fiscal year 2025 as Embracer went through its major restructuring. The company sold businesses, closed studios, cancelled projects, reduced its workforce, and continued investing heavily in games that had not yet been released. At the same time, weaker operating performance meant that less cash was being generated by the underlying businesses. Some of the businesses that have since been sold also contributed positively to historical free cash flow, meaning comparisons with previous years need to take into account that today's Embracer is a smaller company. Free cash flow improved again in fiscal year 2026, while the free cash flow margin increased from 6.2% to 14.7%. This is an encouraging development, although both remain below their historical peaks. The improvement reflects some of the benefits from the restructuring, including lower costs, reduced investment spending, and better management of cash tied up in the day to day operations of the business. The broader trend is becoming more encouraging because Embracer has significantly reduced its cost base and development spending following several years of restructuring. The company has closed or sold weaker businesses, reduced the number of projects under development, and become more selective about which games receive investment. This should allow a greater proportion of future operating profits to turn into free cash flow if the remaining businesses perform as expected. Management is also putting much greater emphasis on cash generation when deciding where to invest. Beginning in fiscal year 2026/27, Embracer will introduce Cash EBIT as one of its main measures of profitability. The purpose is to provide a clearer picture of the economics of the business by taking the actual amount being spent on game development into account. This is particularly important because game development represents Embracer's largest investment requirement. Management believes the new measure will make it easier to balance spending on future games with the cash being generated by games and businesses today. This increased focus on cash should also encourage greater discipline when deciding which projects deserve additional investment. Looking ahead, there are reasons to believe that Embracer's free cash flow can continue to improve, although investors should expect fluctuations from year to year. Management expects a meaningful improvement in its cash based profitability in fiscal year 2026/27 and expects free cash flow to remain positive, with a larger proportion expected during the second half of the year. Several factors should support this improvement. The restructuring has significantly reduced operating costs, while studio closures and divestments mean Embracer is no longer carrying the costs of several weaker businesses. Management has indicated that the full benefits from actions taken during fiscal year 2025/26 should become more visible in the following year. Development spending is also being concentrated on fewer projects and stronger intellectual properties, which should improve the chances of generating attractive returns from the money invested. Embracer's historical data shows that games based on its core intellectual properties have generated substantially better returns than games based on less important properties. Increasing the proportion of development spending directed toward these franchises should therefore support both profitability and free cash flow over time if management can continue delivering successful games. The planned separation of Fellowship Entertainment and Embracer should further sharpen this focus. Fellowship Entertainment will concentrate many of the group's largest franchises and development studios, while the remaining Embracer will operate as a leaner collection of entrepreneurially managed businesses across games, mobile, distribution, films, retro gaming, remakes, and remasters. Both companies should therefore have clearer priorities when deciding where cash should be invested. However, I would not expect free cash flow or the free cash flow margin to increase smoothly every year. Game development remains unpredictable, and large amounts of cash need to be invested before management knows how successful a game will become. The timing of major releases can therefore have a significant effect on annual cash generation. A year with several successful launches may generate very strong free cash flow, while a year with significant development spending and fewer releases could look considerably weaker. This is one reason why I would focus more on the development of free cash flow over several years rather than any individual year. Embracer's use of free cash flow has also changed significantly. During its period of rapid expansion, a large amount of capital was directed toward acquisitions and game development. More recently, cash has primarily been used to strengthen the financial position, complete the restructuring, fund game development, meet remaining payments related to historical acquisitions, and return capital to shareholders. The balance sheet is now considerably stronger, which gives management greater flexibility over how future cash flow is allocated. Returning cash to shareholders is becoming an increasingly important part of the strategy. Embracer completed SEK 500 million of share repurchases during fiscal year 2025/26 and has announced another share buyback program of SEK 750 million. Management has also stated that once Fellowship Entertainment has been separated, the ambition is for both companies to return capital to shareholders on a regular basis. At the same time, the company will continue reinvesting in game development and its strongest intellectual properties, while the future Embracer may use some of its cash for selective acquisitions in areas where it already has strong positions, such as mobile games, distribution, retro gaming, films, remakes, and remasters. Management has emphasized that future acquisitions should be disciplined and primarily financed through internally generated cash and proceeds from divestments rather than a return to the aggressive acquisition strategy of the past. The free cash flow yield suggests that the shares are currently trading at an attractive valuation. However, we will revisit the valuation later in the analysis.

Debt

Another important area to investigate is debt, and we want to see whether a business has a reasonable level of debt that could be paid off within three years. To assess this, we divide total long-term debt by earnings. When applying this measure to Embracer Group, the result shows that it would take approximately 4,2 years of earnings to pay off its long-term debt. This is above the three-year threshold, although in Embracer's case I do not believe the calculation provides a particularly accurate picture of the company's current financial position. The main reason is that earnings were unusually low in fiscal year 2026. I use adjusted earnings for this calculation because reported earnings were heavily affected by large reductions in the reported value of assets. However, even adjusted earnings were very weak during the year. As the calculation divides debt by earnings, unusually low earnings make the number of years appear much higher. If Embracer succeeds in improving earnings as management expects, the result of this calculation should improve considerably even without any further reduction in debt. Another reason the calculation can be misleading is that it looks at long-term debt without taking Embracer's cash into account. The company ended fiscal year 2026 with a net cash position, meaning that it had more cash than interest-bearing debt. This is a significant change from a few years ago, when Embracer had taken on substantial debt to fund its rapid expansion. The improvement is the result of several years of restructuring. Embracer sold businesses including Gearbox, Saber Interactive, and Easybrain, while the spin-off of Asmodee also changed the group's financial structure. Cash generated from divestments and the business itself has been used to reduce debt, leaving Embracer with a much stronger balance sheet. The company is now financially strong enough that management has shifted from prioritizing debt reduction toward returning capital to shareholders. Embracer completed a SEK 500 million share buyback program in fiscal year 2026 and has announced another SEK 750 million share buyback program. Management has also stated that it wants both Embracer and Fellowship Entertainment to return capital to shareholders regularly following the planned separation. This would be unlikely if reducing debt remained an urgent priority. Hence, while Embracer fails my normal three-year debt test based on fiscal year 2026 earnings, I do not consider debt to be a concern. The unusually weak earnings make the calculation look worse than the underlying financial position, while the company's net cash position provides a much better indication of its ability to meet its financial obligations. If earnings improve as expected over the coming years, the traditional debt-to-earnings calculation should also begin to look considerably stronger.

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Risks

Competition is a risk for Embracer Group because the gaming and entertainment industries are highly competitive, with companies competing not only for consumer spending but also for something even more limited: people's time. Players today have access to thousands of games across PC, consoles, mobile devices, and virtual reality, while gaming itself competes with other forms of entertainment such as streaming services, social media, YouTube, and short form video. Every hour a consumer spends playing another game or using another entertainment service is an hour that cannot be spent with one of Embracer Group's products. This makes attracting and retaining players increasingly difficult, even when a company produces a high quality game. Competition within gaming itself is particularly intense. Embracer Group competes with some of the world's largest game publishers, including Electronic Arts, Take Two Interactive, Ubisoft, and Tencent, as well as the gaming businesses owned by Microsoft and Sony. Many of these competitors have considerably greater financial resources and can invest heavily in game development, marketing, technology, and new intellectual properties. They can also support unsuccessful projects more easily because a disappointing game represents a smaller part of their overall business. For Embracer Group, the performance of individual games can have a much larger effect on annual profitability and cash flow. The enormous amount of content available also creates a visibility problem. Developing a good game does not guarantee commercial success if consumers never discover it. Digital stores have made it easier for developers to distribute games globally, but this has also resulted in consumers having more games to choose from than ever before. Publishers therefore need to spend money on marketing and build strong communities around their games to stand out. Embracer Group's ownership of established franchises such as Tomb Raider, The Lord of the Rings, Metro, Kingdom Come, Gothic, Killing Floor, and Wreckfest helps because existing franchises already have established audiences. However, even recognizable franchises compete against other well known games for consumer attention, and a poorly received release can damage the reputation of a franchise that has taken decades to build. Embracer Group's own experience demonstrates how important this risk can be. Management has increasingly concentrated development spending on its strongest intellectual properties after finding that investments in its core franchises historically generated significantly better returns than investments in less important properties. Core intellectual properties have generated approximately 3,1 times the money invested compared with approximately 1,6 times for non core intellectual properties. Competition is also different across Embracer Group's various businesses. In PC and console games, the company competes against large publishers capable of spending hundreds of millions on major releases as well as smaller independent developers that can occasionally produce unexpected hits. In mobile gaming, the barriers to developing and releasing a game are relatively low, resulting in an enormous number of competing titles. Free to play games also require developers to continuously attract new users and keep existing players engaged, which can require significant spending on advertising and regular new content. DECA Games has built expertise around operating mobile games for long periods, but these games still compete with thousands of alternatives for users' attention and spending. Embracer Group's specialist businesses face competition as well. Milestone competes within racing games, Vertigo Games within virtual reality, Limited Run Games within physical and collector focused gaming, Aspyr within ports and remasters, while PLAION Partners and PLAION Pictures compete in game and film distribution. These businesses benefit from years of specialist knowledge, relationships, catalogs, and established customer communities, but none of these positions eliminates competition. New technologies, changes in distribution, or stronger competitors entering these niches could reduce their advantages over time. Competition for talent represents another important risk. Games are ultimately creative products, and successful development depends heavily on experienced developers, designers, writers, artists, engineers, and studio leaders. Talented employees can move between companies relatively easily, and Embracer Group competes against both large global publishers and smaller independent studios for these people. Larger competitors may be able to offer higher compensation, larger development budgets, or the opportunity to work on globally recognized franchises. Losing important creative leaders or experienced development teams could delay games, increase costs, or reduce the quality of future releases. Another unusual competitive dynamic is Embracer Group's relationship with the companies controlling the major gaming platforms. Games are distributed through platforms operated by companies such as Microsoft, Sony, Nintendo, Apple, and Google. Embracer Group therefore depends on companies that can simultaneously act as distributors, business partners, and competitors through their own games and studios. Changes to platform fees, store visibility, subscription services, recommendation systems, or other commercial terms can influence how easily Embracer Group reaches consumers and how much money it earns from its products.

Development risks are a risk for Embracer Group because a significant part of the company’s future success depends on its ability to consistently develop and release high quality games. Game development is expensive, time consuming, and difficult to predict, particularly for large PC and console games that can require several years of development before generating any revenue. During that period, consumer preferences, technology, competing games, and market conditions can all change. This creates a risk that even a project that appeared attractive when development began may be less appealing by the time it reaches the market. The financial risk has also increased as modern games have become larger and more complicated to develop. Major games can require large development teams, advanced graphics, detailed environments, online infrastructure, artificial intelligence, extensive testing, and significant amounts of content. This means Embracer Group can invest substantial amounts of money in a game before knowing whether it will become commercially successful. If an important game performs poorly, the company may therefore lose much of the money invested over several years while also missing the revenue and cash flow management expected the game to generate. Development delays represent another important risk. Games frequently require additional development time because of technical problems, quality concerns, changes in scope, or feedback from testing and players. Delaying a game can be the correct long term decision if additional development results in a much better product, but it still has financial consequences. Development costs continue while the game generates no revenue, while expected sales and cash flow are pushed into a later period. A delay can also cause a game to miss an important holiday season or other attractive sales period. It may instead be released at the same time as major competing games, making it more difficult to attract attention. For Embracer Group, where a relatively small number of major releases can have a significant impact on annual results, moving one large game from one financial year into another can therefore create substantial fluctuations in revenue, profits, and cash flow. The alternative to delaying a game can be even more damaging. If Embracer Group releases a game before it is ready, poor quality can result in weak reviews, negative player feedback, refunds, and disappointing sales. Problems such as bugs, poor performance, weak gameplay, or missing features can spread rapidly through reviews, social media, streaming platforms, and gaming communities. This means the commercial performance of a game can be damaged very quickly after release. Embracer Group therefore follows a quality first approach, where development teams can be given additional time and resources when management believes this will result in a better game. While this can increase development costs and delay revenue, releasing an unfinished game could have much greater long term consequences. Poor execution can be particularly damaging when Embracer Group is developing games based on established intellectual properties. Franchises such as Tomb Raider, The Lord of the Rings, Metro, Kingdom Come, Gothic, Killing Floor, and Wreckfest already have established fan bases with high expectations. This provides an advantage because these games begin with greater awareness than completely new intellectual properties, but it also creates additional pressure on development teams. A disappointing release can do more than hurt sales of one game. It can reduce players’ trust in the franchise and make them less willing to purchase sequels or other products in the future. This is particularly important as Embracer Group is increasingly concentrating its development spending on its strongest intellectual properties. New intellectual properties carry a different type of development risk. While an established franchise already has an audience, a completely new game must build one from scratch. Embracer Group may spend several years developing a technically strong and well reviewed game only to discover that there is not enough consumer interest to justify the development cost. The video game industry changes rapidly, and developers are effectively trying to predict what consumers will want several years into the future. A concept that appears innovative when development begins may feel less unique when it eventually launches because competitors have introduced similar ideas or consumer preferences have changed. Another development risk comes from technological change. Because games can take several years to develop, the technology available when development begins may be different from the technology available when the game is eventually released. New consoles, graphics technology, game engines, artificial intelligence, and other development tools may require studios to change projects that are already underway. These changes can increase development costs, require additional work, and potentially delay releases. Development risk also does not disappear when a game is released. Many modern games require continued updates, bug fixes, downloadable content, new features, and community support. Players increasingly expect developers to improve games after launch and respond quickly when problems arise. If Embracer Group fails to provide sufficient support, player engagement can decline faster than expected, reducing the amount of revenue generated over the lifetime of the game. There is also a risk that management eventually decides a project should not be completed at all. Cancelling a game can prevent even more money from being invested in a project with poor prospects, but it also means that much of the money already spent may never generate revenue. This became particularly visible during Embracer Group’s restructuring, when several projects were cancelled as management reviewed the development pipeline and concentrated resources on projects with better expected returns. These decisions may improve future capital allocation, but they also demonstrate how much money can be lost when a game spends years in development without eventually reaching the market.

Macroeconomic factors are a risk for Embracer Group because the company operates in a global entertainment industry where consumers ultimately decide how much of their disposable income they want to spend on games and other entertainment. Video games can provide many hours of entertainment and have historically shown some resilience during economic downturns, but they are still discretionary purchases. When consumers face higher living costs, weaker economic growth, unemployment, or declining purchasing power, they may become more selective about which games they buy. This can be particularly important for newly released premium games, where consumers may postpone purchases, wait for discounts, or choose cheaper alternatives. A weaker consumer environment could therefore result in lower sales, greater promotional activity, and slower growth across parts of Embracer Group's portfolio. The impact can also differ depending on the type of game. Consumers may continue playing games they already own while reducing spending on new releases, downloadable content, or in game purchases. This creates a risk for Embracer Group because large games require significant investment for several years before they are released. If economic conditions weaken around the time an important game launches, the company may generate lower sales than originally expected even if the game itself is well received. The timing of economic conditions can therefore have a meaningful effect on the returns Embracer Group generates from its development investments. Higher prices for gaming hardware represent another risk. Consumers need access to consoles, PCs, smartphones, or virtual reality equipment to play Embracer Group's games. If inflation, tariffs, or higher component prices make this hardware more expensive, consumers may delay upgrading or purchasing new devices. This could slow the growth of the potential audience for new games. Embracer Group has specifically highlighted uncertainty around tariffs and rising memory prices, partly driven by strong demand from artificial intelligence infrastructure, as factors that could increase console prices and potentially delay future hardware launches. This is especially relevant for Embracer Group because new generations of consoles and other gaming hardware can help stimulate demand for new games. Macroeconomic conditions can also affect Embracer Group's costs. Game development relies heavily on skilled employees such as programmers, designers, artists, writers, and engineers. Higher wages and general inflation can therefore increase development costs, particularly because major games can require large teams working for several years. If development costs rise faster than the prices consumers are willing to pay for games, the potential return from developing a successful game becomes less attractive. This is particularly important because the gaming industry has experienced rising development budgets over time as players expect increasingly sophisticated graphics, larger worlds, more content, and continued support after launch. Embracer Group may therefore face pressure from both sides during periods of high inflation, with higher costs to create games while consumers become more cautious about spending money on them. Embracer Group's physical distribution businesses create additional exposure to economic conditions. PLAION Partners distributes physical games and hardware, while PLAION Pictures distributes films across European markets. Limited Run Games and other businesses within the group also sell physical games, collector editions, merchandise, and other products. These activities are more directly exposed to transportation costs, tariffs, manufacturing costs, and disruptions to global supply chains than purely digital game sales. Changes in trade policies or new tariffs could therefore increase costs or make some physical products more expensive for consumers. This risk is particularly relevant because Embracer Group intends to retain these distribution and physical entertainment businesses following the planned separation of Fellowship Entertainment. Geopolitical developments represent another risk because Embracer Group operates across many countries and relies on a global network of employees, suppliers, partners, platforms, and customers. Wars, political instability, sanctions, trade restrictions, or changes in international relationships can disrupt development activities or prevent the company from operating normally in certain markets. The war in Ukraine demonstrated this risk for the gaming industry, as development teams operating in the region faced significant disruption and companies had to relocate employees or change the way projects were managed. Similar events in other regions could delay games, increase costs, disrupt distribution, or reduce access to important markets. A broader economic downturn could also affect Embracer Group indirectly through its business partners. The company works with platform owners, retailers, distributors, licensors, technology providers, and other game publishers. Financial pressure on these businesses could result in weaker demand, delayed payments, reduced investment, or changes to commercial relationships. This is particularly relevant for businesses such as PLAION Partners and PLAION Pictures, where part of the business depends on distributing products created by other companies.

Reasons to invest

The Fellowship Entertainment spin off is a reason to invest in Embracer Group because shareholders who own Embracer Group before the separation are expected to receive shares in Fellowship Entertainment while continuing to own shares in the remaining Embracer Group. This means investors will gain exposure to two companies with very different strategies, business models, and opportunities for value creation. Instead of keeping premium intellectual properties, large game development studios, mobile games, distribution businesses, and specialist entertainment companies inside one complex group, the separation should allow each company to focus on what it does best. Management believes greater focus will create better conditions for execution, clearer capital allocation, and stronger long term value creation. The separation is planned for 2027 and follows the previous spin offs of Asmodee and Coffee Stain Group. These earlier separations have also provided management with experience in creating independent companies and have reinforced its belief that businesses with different characteristics can perform better when they have their own management, strategy, financial structure, and investor base. Fellowship Entertainment will become the more concentrated intellectual property and game development company. It will own or control some of the most attractive franchises currently within Embracer Group, including The Lord of the Rings, The Hobbit, Tomb Raider, Metro, Kingdom Come, Dead Island, Darksiders, and Remnant. The strategy is built around creating game worlds that generate fans rather than simply customers. The idea is that a successful franchise can become more valuable over time as players develop a relationship with its characters and universe and return for future games. This can create a cycle where successful games increase the audience for a franchise, which supports sequels, licensing agreements, merchandise, films, television, and other entertainment products. Fellowship Entertainment will therefore have several potential ways to create value from the same intellectual property rather than depending entirely on the initial sale of a game. The Lord of the Rings is perhaps the clearest example of this opportunity. Fellowship Entertainment holds important commercial rights to one of the world's best known entertainment properties, with an audience spanning several generations and opportunities across games, film, television, merchandise, and other categories. Tomb Raider provides another globally recognized franchise, while Metro, Kingdom Come, Dead Island, Darksiders, and Remnant provide additional established worlds with existing communities. Management believes these assets are currently undervalued and that placing them inside a company specifically designed around developing and commercializing intellectual property should make it easier to realize more of their potential. The company will have more than 1,600 internal developers across studios including Crystal Dynamics, Warhorse Studios, 4A Games, Dambuster Studios, Eidos Montréal, Gunfire Games, and others. These studios have experience developing major games within specific genres and franchises. Rather than operating as a loose collection of studios, Fellowship Entertainment intends to become a more integrated group where teams can share technology, expertise, and development capabilities while maintaining the creative strengths that made the individual studios successful. This should allow management to direct resources toward the franchises and projects where it sees the greatest potential. Licensing could become another important source of growth. Fellowship Entertainment is establishing a dedicated intellectual property management and licensing division designed to turn franchise ownership into recurring revenue across games, film, consumer products, and other categories. Licensing can be particularly attractive because Fellowship Entertainment does not necessarily need to fund the entire development or production of a product itself. Instead, external partners can invest their own capital while paying Fellowship Entertainment for the right to use its intellectual property. If executed successfully, this could create higher margin and more recurring revenue while allowing the company to expand its franchises without carrying all of the financial risk itself. The separation could be equally important for the remaining Embracer Group. Without Fellowship Entertainment, Embracer Group will become a smaller and more focused collection of decentralized businesses operating across PC and console games, mobile games, physical game distribution, film distribution, retro gaming, virtual reality, remakes, remasters, and other specialist areas. Companies such as THQ Nordic, DECA Games, Milestone, Aspyr, Tripwire Interactive, Limited Run Games, PLAION Partners, and PLAION Pictures have different economics from the large AAA development operations that will sit within Fellowship Entertainment. Separating the two should make it easier for management and investors to understand how these businesses are actually performing. The future Embracer Group is also intended to operate very differently from the acquisition driven company investors became familiar with during the previous decade. Management has described the goal as moving away from the identity of a growth focused serial acquirer and toward becoming more of a long term compounder focused on profitable growth and cash generation. Each major business within Embracer Group is expected to generate positive Cash EBIT on a recurring basis, while tighter cost control and more disciplined capital allocation should become central to how the group is managed. This represents an important change from the previous strategy, where rapid expansion sometimes took priority over returns on the capital invested. Embracer Group should also become more predictable after the separation. While it will retain game development exposure through businesses such as THQ Nordic and Milestone, a larger part of the company will consist of businesses that are not entirely dependent on major new game releases. PLAION Partners generates revenue by distributing games and hardware for other companies, PLAION Pictures distributes films across European markets, DECA Games specializes in mobile games with long product lives, while businesses such as Limited Run Games serve established communities around physical and retro games. These activities should provide a broader mix of revenue and reduce the importance of any individual AAA release to the remaining company. There should still be opportunities for growth within Embracer Group. Management sees potential to improve profitability across several existing businesses while continuing to invest in successful niches. The two companies should also be able to continue working together where it makes economic sense. Separation does not mean that useful commercial relationships need to disappear. PLAION Partners, for example, has specialist expertise in physical game distribution and already works with some of the world's largest gaming companies. Fellowship Entertainment could continue using these capabilities after becoming independent, just as Embracer Group has maintained commercial relationships with businesses that were previously spun off. This allows both companies to gain the benefits of greater strategic independence without necessarily giving up valuable commercial relationships.

The game pipeline is a reason to invest in Embracer Group because both Fellowship Entertainment and the future Embracer have a broad collection of upcoming releases, established franchises, and experienced development teams that can support growth for many years. Game development is naturally unpredictable, but Embracer Group is entering a period where several important projects are moving closer to release while management is also becoming more selective about which games receive capital. Rather than focusing on the number of games being developed, the strategy is increasingly centered on fewer, higher quality projects with stronger intellectual properties and better expected returns. This should improve the chances that future releases contribute meaningfully to revenue, profits, and cash flow. Recent releases provide some evidence that this more focused approach can work. REANIMAL was well received by both critics and players. As a completely new intellectual property, this is particularly encouraging because the game did not begin with the same established audience as franchises such as Tomb Raider or Kingdom Come. The positive reception suggests that Embracer Group can still create new franchises rather than depending entirely on existing intellectual properties. Management believes REANIMAL has the potential to become something the company can build on over the long term, which could eventually lead to sequels, additional content, and other opportunities around the franchise. Screamer and Ride 6 were also positively received, supporting the strength of Milestone as a specialist developer of racing games. Milestone has spent decades building expertise in this genre, and successful releases can strengthen both the studio and the franchises it manages. Management has emphasized that new games increasingly need continued commercial support after launch rather than simply relying on the first few weeks of sales. Games can take time to reach breakeven as awareness grows, players discover them, discounts expand the audience, and additional content keeps communities engaged. This means the value of a successful release can continue building for years rather than being determined entirely by launch performance. This is already visible in several of Embracer Group's established franchises. Kingdom Come: Deliverance II continued generating strong sales after its initial release and surpassed five million copies sold within its first year. The game also received strong critical recognition, including PC Gamer's Game of the Year and a BAFTA Games Award for Best Narrative. Its success demonstrates the potential value of investing behind a strong development studio and an established franchise over time. Warhorse Studios is now working on another release within the Kingdom Come franchise, giving Fellowship Entertainment an opportunity to build further on the audience and reputation created by the first two games. Warhorse Studios is also developing a new open world game set in Middle earth. This project is particularly interesting because it combines one of Fellowship Entertainment's most valuable intellectual properties with a studio that has already demonstrated strong capabilities in large, detailed open world role playing games. Kingdom Come showed that Warhorse Studios can create deep worlds with strong storytelling and player engagement, and applying those capabilities to Middle earth could create a significant long term opportunity if execution is successful. This illustrates one of the main advantages of Fellowship Entertainment's future structure. Rather than simply owning valuable intellectual properties, management wants to match those properties with the development teams best suited to bring them to life. Fellowship Entertainment's near term pipeline is anchored by several major releases. Metro 2039 and Tomb Raider: Legacy of Atlantis are expected to be among the most important games in the current fiscal year. Metro 2039 is being developed by 4A Games, the studio behind the previous Metro titles, and early fan interest has been encouraging. Management has highlighted that the game reached more than one million wish lists unusually quickly following its announcement, providing an early indication of strong interest from the existing Metro community. While wish lists do not guarantee sales, they can provide useful information about player awareness and demand ahead of launch. Tomb Raider: Legacy of Atlantis is another important release because it represents the first major Tomb Raider game in many years. Crystal Dynamics is leading development with support from other Fellowship studios, while Amazon will publish the game. The partnership allows Fellowship Entertainment to benefit from an external publisher with significant marketing and distribution capabilities while retaining exposure to one of its most valuable franchises. Tomb Raider: Catalyst is also in development, creating the potential for a more regular flow of releases from a franchise that historically went through long periods without major new games. The pipeline extends well beyond these near term releases. Darksiders 4 is expected to build on a franchise with an established fan base, while the next mainline Dead Island game is already in development. Dead Island has reached more than 20 million lifetime players, giving the next installment a significant existing audience. Fellowship Entertainment also owns or controls a deep collection of older franchises that are currently underused, including Deus Ex, Legacy of Kain, Saints Row, TimeSplitters, and Red Faction. Management refers to these properties as part of its vault and sees opportunities to bring some of them back through remasters, new games, reimagined versions, or licensing agreements. Activating even a small number of these franchises could create additional value without requiring Fellowship Entertainment to build completely new brands from scratch. Another important part of the investment case is the planned increase in release frequency. Fellowship Entertainment intends to move toward at least two major AAA releases per year and potentially increase this further over time. A more consistent release schedule could make the business less dependent on occasional blockbuster years. Instead of having long periods between major launches, management wants a pipeline where different studios and franchises contribute at different times. This could create a more regular flow of new game revenue while catalog sales and licensing provide a base of recurring revenue between major launches. The future Embracer also has its own opportunities from new releases. While many of the largest AAA franchises will move into Fellowship Entertainment, Embracer will retain experienced businesses such as THQ Nordic, Milestone, Tripwire Interactive, DECA Games, Aspyr, and Vertigo Games. THQ Nordic has a long history of developing, publishing, and reviving established games such as Gothic, SpongeBob, Wreckfest, and MX versus ATV. Gothic 1 Remake is one example of how the future Embracer can use existing intellectual property while benefiting from an established fan base. The company can also continue releasing remakes, remasters, ports, retro products, and smaller games that require less capital than the largest AAA projects. These releases may individually be smaller than Fellowship Entertainment's biggest games, but they can create attractive returns when developed with disciplined budgets and targeted audiences. Embracer's specialist businesses also provide opportunities beyond traditional new game launches. Limited Run Games can create physical and collector editions of existing titles, Aspyr can bring older games to modern platforms, and the group's retro businesses can revive products and hardware for dedicated gaming communities. The planned return of the NEOGEO home arcade system is an example of how nostalgia and established gaming brands can create demand without requiring the development of an entirely new AAA game. These smaller opportunities can complement traditional game development and help Embracer generate value from its catalog in different ways.

The long-term growth of the gaming industry is a reason to invest in Embracer Group because the company operates in what has become one of the largest entertainment industries in the world, with gaming continuing to attract more players, more engagement, and more consumer spending over time. The global games market reached approximately USD 202 billion in revenue in 2025, making it larger than several other major entertainment categories. The market also grew by around 9% during the year, its strongest growth rate since 2020, and exceeded the previous record reached during the pandemic. What is particularly encouraging is that growth has not been limited to a single platform. Embracer Group has exposure to PC, console, mobile, and virtual reality gaming, allowing the company to benefit from growth across different parts of the industry. The long-term development of the games market has also been relatively consistent. Despite occasional weaker years, gaming has grown significantly over the past several decades as the number of players has increased, games have become more accessible, and consumers have spent more time with interactive entertainment. Industry forecasts suggest that the market should continue growing over the coming years, supported by a combination of new players, new hardware, improving technology, and rising spending in markets where gaming is still developing. One important growth opportunity comes from the continued adoption of newer gaming consoles. A significant number of players are still using older systems and have yet to move to newer platforms such as PlayStation 5, Xbox Series X and S, and Nintendo Switch 2. Players using newer hardware generally spend more on games than users of older systems, which means the continued transition can support higher spending across the industry. New hardware also allows developers to create more advanced games that would not be possible on older systems. As more major titles stop supporting older consoles, consumers have another reason to upgrade, which can increase the potential audience for games developed by Embracer Group and Fellowship Entertainment. The later stages of console generations can also be attractive for publishers because developers have had several years to become familiar with the hardware. This can make it easier to get more out of the technology and create larger and more sophisticated games. At the same time, major releases can encourage consumers who have delayed upgrading to finally purchase newer hardware. This could be particularly relevant for Fellowship Entertainment as its pipeline includes major franchises such as Metro, Tomb Raider, Kingdom Come, Dead Island, Darksiders, and Middle earth. A larger installed base of current generation hardware increases the number of consumers that these games can potentially reach. PC gaming represents another attractive part of the market. The PC games market grew strongly in 2025 and has been one of the more consistent areas of the gaming industry in recent years. Unlike consoles, PC gaming is not as dependent on individual hardware generations because consumers continuously upgrade their computers rather than moving from one clearly defined generation to another. PC gaming also benefits from an enormous catalog of older games, independent developers, free to play titles, and major premium releases. This makes the market less dependent on the performance of a small number of blockbuster titles. Embracer Group has significant exposure to PC gaming through many of its studios and franchises, meaning continued growth in the PC market provides a favorable environment for both new releases and catalog sales. The growth of younger gaming audiences also supports the long-term outlook. Games such as Minecraft, Roblox, Fortnite, and other online experiences have introduced gaming to very large numbers of young consumers. These players are growing up with games as a normal part of their entertainment habits in the same way previous generations grew up with television. As these consumers become adults and their purchasing power increases, gaming could capture an even larger share of entertainment spending. This is important because the long-term opportunity for the industry does not depend solely on convincing existing gamers to spend more. It can also grow as new generations of players enter the market and continue gaming throughout their lives. Gaming also benefits from unusually high levels of engagement compared with many other forms of entertainment. A movie may entertain someone for two hours, while a successful game can keep players engaged for tens, hundreds, or even thousands of hours. This creates opportunities to build much deeper relationships between consumers and intellectual properties. Players can become attached to characters, stories, worlds, and gaming communities and return to the same franchise for many years. This is particularly valuable for Embracer Group and Fellowship Entertainment because both companies will own established intellectual properties with dedicated communities. Successful franchises such as Tomb Raider, Metro, Kingdom Come, Gothic, Killing Floor, Darksiders, and Dead Island are therefore not simply individual products. They can become entertainment worlds that players repeatedly return to across sequels, remasters, downloadable content, merchandise, licensing, and other formats. The popularity of game streaming and gaming content provides further evidence of how deeply gaming has become embedded in entertainment culture. Consumers increasingly spend time not only playing games but also watching other people play them through platforms such as Twitch and YouTube. The number of hours watched through gaming live streams remained extremely high in 2025 and increased compared with the previous year. This creates another way for successful games to reach consumers. A popular game can receive enormous exposure through streamers, online communities, social media, and video content without relying entirely on traditional advertising. This can help strong games build audiences quickly and extend their relevance long after launch. Another major long-term opportunity comes from emerging markets. Gaming has historically been concentrated in markets such as North America, Europe, Japan, South Korea, and China, but billions of consumers live in regions where gaming spending remains much lower. Markets such as India, Latin America, the Middle East, Africa, and parts of Southeast Asia have large and increasingly connected populations. As internet access improves, smartphones become more affordable, and disposable incomes rise, more consumers are gaining access to video games. Even relatively small increases in average spending across these enormous populations could create meaningful growth for the global gaming industry. Mobile gaming is particularly important in these markets because smartphones are much more accessible than gaming consoles or high-end PCs. For many consumers in developing countries, a smartphone is their first and sometimes only gaming device. Embracer Group's exposure to mobile gaming through businesses such as DECA Games gives the company a way to participate in this growth without relying entirely on traditional console and PC gaming. Mobile games can also reach global audiences very quickly through digital distribution, allowing successful titles to scale across many countries without the need for physical retail infrastructure. Asian consumers also represent an interesting opportunity for Western game developers. Historically, gaming preferences have differed significantly between Western and Asian markets, but these boundaries are becoming less clear as digital distribution and global gaming communities make it easier for consumers to discover games developed in other regions. Increasing interest in Western games across parts of Asia could expand the potential audience for franchises owned by Embracer Group and Fellowship Entertainment.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,39, which is adjusted EPS from fiscal year 2026. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 32,7% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on Embracer Group's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be SEK 11,70. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Embracer Group at a price of SEK 5,85 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 2.427, and capital expenditures were 91. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 64 in our calculations. The tax provision was -8. We have 223,2 outstanding shares. Hence, the calculation will be as follows: (2.427 – 64 - 8) / 223,2 x 10 = SEK 105,51 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Embracer Group's Free Cash Flow Per Share at SEK 10,47 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is SEK 165,28.

Conclusion

I believe that Embracer Group is an intriguing company with good management. The company has built its moat through its intellectual property, specialized industry expertise, established gaming communities, and strong positions in several entertainment niches that are difficult to replicate. Embracer Group’s historically low ROIC reflects years of aggressive acquisitions and heavy game development spending that failed to generate a corresponding increase in profits. While ROIC remains below my preferred 10% level, the shift toward fewer projects, stronger core IPs, a leaner cost structure, and more disciplined capital allocation provides a credible path toward improving returns over time. Embracer Group’s free cash flow has fluctuated significantly due to the timing of game development investments and major releases, but the improvement in fiscal year 2026 is encouraging. With greater discipline around development spending and an increased focus on cash generation, I believe free cash flow has the potential to improve over time, although significant year to year fluctuations should still be expected. Competition is a risk for Embracer Group because it competes with both large global publishers and thousands of smaller developers for consumers’ limited time and spending. Intense competition for visibility, talented developers, and player engagement means that even high quality games may struggle commercially, while larger competitors often have significantly greater resources to invest in development and marketing. Development risks are also important because developing games requires significant investment over several years before the company knows whether a game will be commercially successful. Delays, rising development costs, poor quality, changing consumer preferences, or disappointing sales can therefore result in significant losses while also reducing future revenue and cash flow. Macroeconomic factors represent another risk because weaker consumer spending and higher hardware prices can reduce demand for games, while inflation and rising wages can make game development more expensive. Geopolitical uncertainty, tariffs, and supply chain disruptions can also affect the company’s development activities and physical distribution businesses. Despite these risks, there are several reasons why I find Embracer Group interesting. The Fellowship Entertainment spin off should create two more focused companies with clearer strategies, while existing shareholders are expected to receive shares in Fellowship Entertainment and retain their Embracer Group shares. The separation could unlock more value from Fellowship Entertainment’s premium franchises while allowing the remaining Embracer Group to become a leaner, more disciplined, and more cash focused business. The game pipeline is another reason to be optimistic, as both Fellowship Entertainment and the future Embracer have several promising upcoming releases supported by established franchises and experienced development teams. A greater focus on fewer, higher quality projects and a more consistent release schedule could support stronger revenue, profits, and cash flow over time. Both companies should also benefit from the long term growth of the gaming industry, which continues to attract more players, engagement, and consumer spending across PC, console, mobile, and other platforms. Growth in emerging markets, new generations of gamers, and increasing digital accessibility should provide both Embracer Group and Fellowship Entertainment with a larger potential audience over time. Overall, I believe there are many things to like about Embracer Group, and I am particularly attracted to the potential of Fellowship Entertainment. Buying a small position ahead of the spin off at a price below my Ten Cap price of SEK 105 could therefore be an interesting way to gain exposure to two very different companies that I believe have the potential to create shareholder value as independent businesses.

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