Fellowship Entertainment: Playing for the Long Game

Fellowship Entertainment is a global video game company with a portfolio that includes some of the industry’s most iconic franchises, from The Lord of the Rings and Tomb Raider to Metro and Deep Rock Galactic. Formed through years of acquisitions and now undergoing a strategic transformation, the company combines AAA game development with high-margin indie titles and transmedia opportunities. With a robust pipeline, improving capital discipline, and exposure to a growing global gaming audience, Fellowship Entertainment is aiming to become a more focused and profitable force in interactive entertainment. The question remains: Does this gaming company deserve a place in your portfolio?

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The Business

Fellowship Entertainment, formerly known as Embracer Group, is a global entertainment company primarily engaged in the development, publishing, and distribution of video games for PC, console, and mobile platforms. It also operates in adjacent media segments, including comic book publishing, IP licensing, film and TV distribution, and merchandise. Headquartered in Karlstad, Sweden, the company oversees a network of development studios across nearly 30 countries and employs over 7.000 people. Its portfolio includes more than 450 owned or controlled franchises, among them some of the most valuable IPs in gaming, such as The Lord of the Rings, Tomb Raider, Metro, Kingdom Come: Deliverance, and Darksiders. Following a major strategic restructuring, Fellowship Entertainment retains the core of Embracer’s premium IP-driven business, while the board game division (Asmodee) and indie/free-to-play segment (Coffee Stain Group) have been spun off as standalone companies. This separation allows Fellowship to sharpen its focus on high-value franchises and expand their reach through both games and other media formats. Fellowship Entertainment’s competitive moat stems from four key strengths: ownership of globally recognized franchises, a growing transmedia ecosystem, a decentralized global studio network, and a proven track record in core gaming segments. First, its ownership of globally recognized franchises provides durable appeal and monetization potential across games, streaming, licensing, and merchandise. These IPs carry significant brand equity and audience loyalty, offering long-term relevance across platforms and formats. Second, the company is building a transmedia ecosystem designed to extend each franchise’s value well beyond traditional gaming. By developing content across multiple verticals—such as comics, film, and consumer products—it can amplify the reach and commercial impact of its IPs. Third, its decentralized global studio network offers a blend of creative autonomy and shared infrastructure. This model supports both innovation and efficiency, empowering studios to focus on quality while benefiting from group-wide resources and publishing capabilities. Fourth, Fellowship has proven its ability to execute in core gaming segments. The recent success of Kingdom Come: Deliverance II illustrates its commitment to supporting high-quality projects that resonate with players and deliver strong financial performance. With a strong IP portfolio, broad transmedia ambitions, and a flexible global development structure, Fellowship Entertainment is well positioned to remain a leading force in gaming and entertainment over the long term.

Management

Phil Rogers serves as the CEO of Fellowship Entertainment, a role he assumed on August 1, 2025, following the strategic separation of the former Embracer Group into three standalone public companies. He brings over two decades of leadership experience in the video game and entertainment industries, with a background in managing global franchises, overseeing creative studios, and driving transmedia expansion across games, film, and other formats. Prior to becoming CEO of Fellowship Entertainment, Phil Rogers was the head of the Middle-earth & Friends division within Embracer Group, where he played a central role in shaping the company's strategy around high-value intellectual properties. Under his leadership, the group deepened its investment in franchises such as The Lord of the Rings and Tomb Raider, laying the groundwork for broader storytelling opportunities across gaming and other media. His vision was instrumental in positioning the company for its current focus on premium IP development and transmedia integration. Earlier in his career, Phil Rogers served as CEO of Crystal Dynamics and Eidos Interactive, two of the industry’s most respected game development studios. During his tenure, he led the successful reboot of the Tomb Raider franchise, which revitalized one of gaming’s most iconic characters and demonstrated his ability to balance creative ambition with commercial execution. He also played a key role in expanding these franchises beyond gaming into comics, merchandise, and film adaptations, establishing strong licensing frameworks and partnerships. Phil Rogers holds a degree in business and has spent much of his career at the intersection of creative production and global business strategy. His leadership style is often characterized as collaborative, long-term focused, and committed to empowering studio teams to execute on their creative visions. He places particular emphasis on building and sustaining fan-first franchises with multi-decade relevance. As CEO of Fellowship Entertainment, Phil Rogers is expected to lead the company through its next phase of growth by leveraging its expansive IP portfolio, strengthening its global development network, and executing on its transmedia strategy. His experience with premium franchises, proven ability to manage complex organizations, and deep understanding of both creative and commercial dynamics make him well-suited to guide Fellowship Entertainment in its ambition to become a leading force in global entertainment.

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. Fellowship Entertainment has achieved a low ROIC since 2018. It was relatively strong between 2016 and 2018, when the company operated with a lean structure and a focused portfolio, primarily under the THQ Nordic brand. At the time, investments were modest and earnings were healthy relative to the capital employed. However, starting in fiscal year 2019, ROIC began to decline sharply. This was largely due to the company’s aggressive acquisition strategy, where it spent heavily to buy dozens of game studios, publishers, and franchises around the world. While these acquisitions were intended to support long-term growth, they also tied up large amounts of money in assets that did not produce immediate profits, such as the rights to game titles, future payments to sellers, and the extra amounts paid over book value for acquired companies. As a result, capital invested in the business grew much faster than profits, leading to a steady decline in ROIC. It turned negative in fiscal year 2022, during the peak of the company’s acquisition spree, when over 25 companies were purchased, including well-known names like Gearbox and Aspyr. Many of the newly acquired studios struggled to deliver results. Some projects were delayed, others underperformed, and costs rose significantly as the company expanded its workforce and absorbed the added expenses of running a much larger organization. At the same time, the company wrote down the value of certain acquisitions that fell short of expectations, further hurting earnings. Since no divestments had yet taken place, these issues put a heavy strain on the company’s balance sheet and pushed ROIC into negative territory. In fiscal year 2025, ROIC began to improve as Fellowship Entertainment took steps to become more focused and financially disciplined. The company sold off non-core assets like Gearbox and Saber Interactive, which freed up capital and allowed more attention to be placed on its strongest franchises. It also narrowed its strategy to a smaller group of high-potential IPs such as The Lord of the Rings, Tomb Raider, and Kingdom Come: Deliverance. With fewer projects and better allocation of resources, execution improved. The success of Kingdom Come: Deliverance II showed that focusing on quality over quantity can lead to better financial outcomes. While ROIC remains below ideal levels, the progress made in fiscal 2025 points to a more thoughtful approach to growth, with greater focus on making each investment count. Looking ahead, there is reason to believe ROIC could continue rising if the company sticks to this path.

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. Equity at Fellowship Entertainment grew steadily, and often sharply, from 2016 to 2023 because the company raised large amounts of capital to fund its rapid expansion. Most of this growth came from issuing new shares. Investors were optimistic about the company’s long-term vision and acquisition strategy, so it was able to raise billions of Swedish kronor from the market. These capital infusions, combined with retained earnings from profitable years and increases in asset values from acquisitions, pushed equity higher year after year. Since 2023, however, equity has started to decline. This is mainly due to write-downs on assets that did not perform as expected, which reduced the company’s reported value. At the same time, the company has not raised significant new capital in the past two years and has instead shifted its focus toward streamlining operations and selling off non-core parts of the business. With fewer share issuances and a more selective strategy, equity is no longer being boosted by aggressive expansion. That said, a decline in equity caused by one-time adjustments or deliberate restructuring is not necessarily a red flag, especially if it signals a transition toward a more focused and sustainable business model.

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. Fellowship Entertainment has managed to deliver relatively high free cash flow over the past ten years thanks to the nature of its business and the way it structured its growth. Video game publishing, especially when successful titles are involved, can be a high-margin business once development costs are covered. Many of the company’s titles continued to generate revenue long after their initial release, especially through digital sales, updates, and downloadable content, which required little additional investment. The company also benefited from scale, as more studios and franchises were added under its umbrella. While capital expenditures were relatively low compared to industrial companies, operating cash flow was often strong, particularly in years when major games performed well or when acquired companies contributed positively to earnings. However, free cash flow declined sharply in fiscal year 2025. This drop was mainly due to the company’s restructuring process, which included the sale of several businesses, the winding down of certain projects, and upfront costs tied to streamlining operations. While some of these moves were intended to improve the company’s long-term focus and profitability, they also temporarily reduced its cash-generating capacity. In addition, the company invested heavily in the development and launch of key titles, which required significant spending before the returns could materialize. As a result, the levered free cash flow margin fell to its lowest level since fiscal year 2020. For now, the lower margin reflects a transition period rather than a breakdown in the underlying business model, which means it should not be something to worry about. The company uses its free cash flow to reinvest into acquisitions and game development. Instead of paying dividends or buying back shares, it has prioritized growth, using cash to acquire IPs, studios, and technology. The free cash flow yield suggests that the shares are trading at an attractive valuation, but we will revisit 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 Fellowship Entertainment, the result shows that it would take approximately 0,4 years of earnings to pay off its long-term debt. This is significantly below the three-year threshold. The low debt level in fiscal year 2025 is a clear change from earlier years, when the company had taken on a lot of debt to fund its rapid expansion. This improvement is likely because of the spin-off of Asmodee, which meant that part of the debt was transferred to the new, separate company. On top of that, Fellowship Entertainment sold off some of its less important businesses, including Gearbox and Saber Interactive, which brought in cash that was used to pay off debt. These steps are part of a larger effort to simplify the business and improve its financial health. Hence, debt is not a concern for me if investing in Fellowship Entertainment.

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Risks

Competition is a risk for Fellowship Entertainment because the interactive entertainment industry is not only highly competitive but also rapidly changing. The company competes directly with global giants such as Electronic Arts, Take Two, Activision Blizzard, Ubisoft, and Tencent, all of which have deeper pockets and larger teams. These competitors can afford to spend more on developing blockbuster titles, launching aggressive marketing campaigns, and attracting top industry talent. Fellowship Entertainment also depends on platform owners like Sony, Microsoft, and Nintendo, companies that not only control access to key gaming platforms but also develop their own competing titles. This puts Fellowship in a position where it must collaborate with, and simultaneously compete against, some of the most powerful players in the industry. In mobile gaming, the competition is even more intense, with an overwhelming number of free-to-play titles flooding the market from both large companies and small independent studios. Standing out in this environment is difficult, especially when many games offer similar mechanics and constantly fight for users’ time and attention. On top of that, Fellowship is competing not just with other games, but with other forms of entertainment. Streaming services, social media platforms, and short-form video apps like TikTok are all competing for the same slice of consumer attention, often offering content that is cheaper, quicker, or more accessible. The shift toward live-service and subscription-based models adds another layer of pressure, as players increasingly expect games to be regularly updated with new content. This means that even after a game is released, the work is far from over. Keeping players engaged requires long-term investment, creative output, and operational resources that some competitors are better positioned to sustain. The risk grows as tech giants like Apple, Google, and Amazon expand their focus on gaming, bringing not only financial muscle but also control over distribution channels and customer data. If Fellowship Entertainment falls behind in terms of innovation, fails to adapt to changing player expectations, or struggles to maintain the visibility of its key franchises in a crowded marketplace, it could lose market share and see lower returns on its game development efforts. There is also the risk of losing experienced developers and creative leads to larger studios that can offer more attractive compensation or opportunities.

Development risk is a significant concern for Fellowship Entertainment because the company’s success depends heavily on its ability to consistently deliver high-quality games, both new titles and updates to existing franchises. Game development is a complex, costly, and time-consuming process, especially for the large-scale AAA titles that make up a key part of the company’s strategy. As the industry continues to raise the bar in terms of graphics, gameplay depth, and live-service features, the risk of delays, budget overruns, or quality shortfalls has only increased. Fellowship Entertainment faces the challenge of coordinating multiple studios across regions, often with different cultures, workflows, and technical systems. This can make development timelines harder to manage and increases the likelihood of delays. If a major game release is pushed back, it can lead to lost revenue in the short term, missed seasonal sales windows, and damage to relationships with both players and distribution partners. In some cases, delays may also force the company to release a game at a less favorable time, competing with bigger titles or missing key holiday periods, further reducing its commercial potential. Even more damaging is the risk of releasing a game that fails to meet expectations. In today’s market, player feedback spreads quickly, and a poorly received title, whether due to bugs, performance issues, weak storytelling, or lack of innovation, can see disappointing sales regardless of the brand attached to it. This not only hurts financial performance but can also erode the long-term value of Fellowship Entertainment’s key IPs. The reputational hit from one poorly executed release can ripple across future projects, especially in an environment where players expect post-launch support, regular updates, and strong community engagement. There is also execution risk when it comes to reviving older franchises or adapting well-known IPs like The Lord of the Rings or Tomb Raider. These projects carry high expectations from dedicated fanbases, and failure to meet those expectations could trigger backlash that affects not just one title but the broader perception of Fellowship Entertainment’s brand and capabilities.

Macroeconomic conditions present a meaningful risk for Fellowship Entertainment because the company operates in a global, consumer-driven industry that is sensitive to shifts in economic stability, purchasing power, and geopolitical events. When economic conditions weaken, whether due to inflation, high interest rates, or slower global growth, consumers often cut back on discretionary spending. Video games, while popular, are still considered non-essential, and demand can suffer during periods of economic stress. A weak consumer environment may lead to lower sales, especially for full-priced AAA titles, in-game purchases, and downloadable content. Fellowship Entertainment is also exposed to fluctuations in production costs, labor markets, and currency movements across the regions where it operates. Rising wages, inflation in development hubs, or unfavorable exchange rates can increase costs and squeeze margins. In recent years, the broader gaming industry has faced rising development costs while revenue growth has slowed. This imbalance has triggered layoffs and studio closures across the sector. While this has created a larger pool of available talent, the instability in the industry can also make it harder to retain key employees, plan long-term projects with confidence, or scale teams predictably. Developers may become hesitant to join or stay with a company if they fear restructuring, project cancellations, or shifting priorities. In addition, Fellowship Entertainment is exposed to geopolitical risks. The company has development teams and partners across different parts of the world, and its operations could be affected by conflicts, trade tensions, sanctions, or regulatory changes. For example, the war in Ukraine caused disruptions to some parts of the business, and while operations there have resumed, it illustrates how geopolitical crises can directly affect workflow and output. Changes in trade policies or tariffs could also increase the cost of distributing physical products or impact licensing arrangements in key markets.

Reasons to invest

Acquisitions, divestments, and spin-offs are a reason to invest in Fellowship Entertainment because they are central to the company’s transformation into a more focused, efficient, and higher-quality business. Over the past several years, Embracer Group pursued a rapid expansion strategy, acquiring dozens of studios and IPs. While this led to short-term complexity and rising debt, the company is now actively unlocking value from these assets through targeted divestments and strategic spin-offs. One of the clearest examples of this shift is the successful spin-off of Asmodee, which now operates as an independent, publicly listed company. That move not only improved the balance sheet by transferring debt and costs but also demonstrated that Embracer is serious about sharpening its portfolio and surfacing hidden value. The next major step in this strategy is the planned spin-off of Coffee Stain Group by the end of 2025. This spin-off will allow Coffee Stain, home to successful titles like Deep Rock Galactic, Goat Simulator, Satisfactory, and Valheim, to operate independently with a structure better suited to its fast-moving, high-margin, community-driven business model. For shareholders, this separation means a more transparent view of each business’s performance, clearer capital allocation, and the potential to benefit from the future upside of both companies. At the same time, the formation of Fellowship Entertainment as the new core entity gives investors exposure to a streamlined group of high-value franchises and top-tier studios, including The Lord of the Rings, Tomb Raider, Metro, and Kingdom Come: Deliverance. By reorganizing around its strongest IPs and integrating only the most successful or promising studios, Fellowship is taking concrete steps to improve profitability and execution. These transactions are not just about cutting costs, they are about building two well-defined companies, each able to pursue tailored strategies with greater operational focus. With more efficient structures, better capital discipline, and reduced financial complexity, both Fellowship Entertainment and Coffee Stain Group are positioned to create long-term value. For investors, this ongoing transformation presents a compelling opportunity to benefit from the unlocking of shareholder value, improved returns on capital, and stronger strategic execution across two distinct but complementary gaming platforms.

The pipeline is a compelling reason to invest in Fellowship Entertainment because it highlights the company’s ability to consistently deliver a large and diverse slate of games, spanning everything from major AAA releases to remakes, indie hits, and original IP. For the upcoming fiscal year 2025/26 alone, the company expects to release 76 different titles, including a mix of new franchises, sequels, and remasters. This volume and variety not only spreads risk across multiple genres and audiences, but also provides a steady flow of potential revenue sources throughout the year, rather than depending on just one or two major titles. Two major AAA games are expected to lead the release schedule in FY 2025/26. The first is Killing Floor 3. The second is MARVEL 1943: Rise of Hydra, developed by Skydance Games. While margins on this title are expected to be lower due to shared economics with partners, the game is projected to generate significant revenue and draw broad interest thanks to the Marvel brand. Although a third planned AAA release has been pushed into the following year, management views this delay as a necessary step to ensure quality, similar to the approach taken with Kingdom Come: Deliverance II, which ended up performing well both critically and commercially. Looking further ahead, Fellowship Entertainment has nine more AAA games planned across fiscal years 2026/27 and 2027/28, marking a clear step up in release cadence. This is a notable improvement compared to the company’s historical pace of just over one AAA release per year, suggesting stronger forward momentum and more frequent financial contributions from high-profile titles. While delays are always a possibility in game development, the size and structure of the pipeline give the company flexibility, if one game slips, others are there to fill the gap. Importantly, the pipeline is not only about blockbusters. Fellowship Entertainment also has a strong lineup of mid-sized and indie games that cater to specific communities and often deliver high margins. Titles like Deep Rock Galactic: Rogue Core, REANIMAL, Fellowship, and the long-awaited console launch of Satisfactory all serve as examples of how the company balances big-budget projects with creatively driven, community-backed experiences. These games may not dominate headlines like a Marvel release, but they often enjoy strong fan loyalty and steady performance over time.

Operating in a globally expanding and deeply engaging industry is a reason to invest in Fellowship Entertainment. The video game industry is the largest entertainment sector in the world, generating more revenue than film, television, and music combined. It reached an estimated USD 183 billion in 2024 and continues to grow, supported by a rising global player base that reached 3,4 billion people, nearly half the world’s population. This number is expected to increase steadily in the years ahead, which means more potential customers, more engagement, and a larger addressable market for developers and publishers like Fellowship Entertainment. While growth has normalized from the breakneck pace seen during the pandemic, the underlying fundamentals remain strong. In 2025, the market is expected to grow by about 5%, driven by the launch of new consoles like the Nintendo Switch 2, more premium content on PC, and a resurgence in mobile gaming. Across platforms, console, PC, mobile, and even VR, the appetite for high-quality, immersive gaming experiences remains healthy. Fellowship Entertainment is positioned to benefit from this steady demand with its mix of AAA titles, mid-sized games, and live-service offerings. What makes this industry especially appealing is not just its size, but its level of engagement. Gaming is increasingly social, immersive, and community-driven. Players are no longer just passive consumers, they form active communities, drive content visibility, and shape game development through feedback and interaction. Fellowship Entertainment’s strategy of staying close to these communities and building franchises that evolve over time aligns well with where the industry is headed. As younger generations continue to favor interactive entertainment over traditional media, the value of owning strong IPs and delivering content that resonates with players across platforms is likely to increase. The shift from one-time purchases to ongoing engagement models like live-service games and subscriptions creates recurring revenue opportunities for companies that can deliver consistent value. In this context, Fellowship Entertainment, with its portfolio of recognized franchises, strong pipeline, and focus on premium content, is well placed to participate in the industry’s next phase of growth.

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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 12,31, which is from fiscal year 2025. I have selected a projected future EPS growth rate of 12%. Finbox expects EPS to grow by 12,2% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 24, which is twice the growth rate. This decision is based on Fellowship Entertainment'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 226,81. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Fellowship Entertainment at a price of SEK 113,41 (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 2.318, and capital expenditures were 129. 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 90 in our calculations. The tax provision was 105. We have 225,1 outstanding shares. Hence, the calculation will be as follows: (2.318 – 90 + 105) / 225,1 x 10 = SEK 103,64 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 Fellowship Entertainment's Free Cash Flow Per Share at SEK 9,72 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is SEK 133,90.

Conclusion

I believe that Fellowship Entertainment is an intriguing company with good management. The company has built a moat through its ownership of globally recognized franchises, a growing transmedia ecosystem, a decentralized global studio network, and a strong presence in core gaming segments. ROIC has been disappointing in recent years, largely due to poor timing and heavy acquisition activity, but with the latest restructuring efforts there is room for improvement. Free cash flow declined in fiscal year 2025, also as a result of restructuring, but should improve going forward. Competition is a risk because Fellowship operates in a fast-moving industry alongside global players that can outspend it on development, marketing, and talent. The company must compete not only with major publishers and platform owners but also with other forms of entertainment, in a market where consumer expectations are constantly rising. Development risk is also a concern, as building high-quality games requires significant investment and coordination, with no guarantee of success. Delays, cost overruns, or poorly received launches can hurt both short-term sales and the long-term value of its key franchises. Macroeconomic conditions are another risk, since consumer demand for games may weaken during inflationary periods, high interest rates, or slower economic growth. Fellowship is also exposed to currency fluctuations, rising costs, and geopolitical disruptions that could impact operations or planning. Acquisitions, divestments, and spin-offs are a reason to invest because they are central to the company’s transformation into a more focused and efficient business. By shedding non-core assets and spinning off divisions like Asmodee and Coffee Stain Group, the company is unlocking value, improving capital allocation, and positioning each unit for long-term growth. The pipeline is another reason to invest, as it includes a diverse slate of 76 games in fiscal year 2025/26, ranging from AAA titles like Killing Floor 3 and Marvel 1943 to high-margin indie and mid-sized games. This breadth reduces reliance on any single hit and supports recurring revenue across multiple genres and audiences. Lastly, Fellowship operates in a growing and deeply engaging industry. The global gaming market is the largest entertainment sector, with over 3,4 billion players and continued growth expected. With its strong IPs, premium content, and player-focused strategy, Fellowship is well positioned to benefit from long-term industry trends. I believe Fellowship Entertainment could be a good long-term investment below the Ten Cap price of SEK 103 if you want exposure to the gaming market.

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