Looking at Sweden’s NetEnt gives you a smile, a laugh, and a little tickle of fear. A smile because it is by all measures a successfully managed, successfully executed company with finances in tip-top shape. Fundamentally, there is nothing to say in criticism of NetEnt in terms of the company itself. A laugh though, because some of the fluff in its reports is so full of egalitarian nonsense that it will make you chuckle. Fear because the currency regime in Sweden is at historic extremes and there’s that same issue with Malta covered back in March which I won’t further elaborate on here.
To address the elephant in the room first, though admitting NetEnt is as efficiently run a gaming company as you can get these days, I avoided calling it a full on buy because of issues with the Eurozone at the time, which were seriously flaring up in March. Those flares have subsided for now, and NetEnt is up 94% since. It has vastly outperformed all major Swedish indexes, and if not for its location I would buy it in a heartbeat. So in humility I regret a lost trade here. That can’t be made up for by buying it now, but the risks remain here. Trading is the inverse of love. Worse to have traded and lost than never to have traded at all.
To get the bad out of the way first, Sweden’s monetary policy is insane. Interest rates have been negative there since March in a race to the bottom with the Euro that it seems the Riksbank, Sweden’s Central Bank, is about to lose, according to Bloomberg. Mario Draghi is printing too much and the Krona is appreciating too fast, and with interest rates already at negative .35%, there is no more devaluing to do. For the monetary history buffs, the Riksbank is the oldest Central Bank in the world founded in 1668, and policy has been known to be quite nuts at times. Back in September 1992, the Riksbank shot interest rates up to 500% for a few days in a move to save the Krona from devaluation, which failed by November. This is how fickle paper is. A serious disturbance in the Euro/Krona exchange rate would only affect NetEnt moderately, as a Krona appreciation of 10% would have damaged earnings by 60M SEK, 60% of its latest quarterly income. Bad, but not catastrophic. This can actually happen. The Krona jumped over 2% against the Euro just yesterday.
Further, Sweden is in the throes of yet another housing bubble (expected with negative interest rates), with the government even moving to force homeowners to pay off principle in fear the market is already out of hand. Sweden’s National Institute of Economic Research warned earlier this month that the market could soon end up crashing after doubling in less than 10 years. This of course has nothing directly to do with NetEnt but when you’re headquartered in a country of monetary cokeheads like this, unexpected things can happen.
Now to get the chuckles out of the way, there’s this gem from NetEnt’s last annual report:
Now everyone whip out your guitars and sing Kumbaya.
The only way to make a company succeed is to make sure you have the best people working there regardless of gender. If a manager sees that an employee is not performing well, said employee will be replaced with a better employee regardless of gender. The bottom line is it’s about profits. Not the gender that produces them. When you’re a manager, it’s the bottom line that matters and you’re not going to pass up on talent just because it’s not the right gender. An activist observer can cheerlead, but then again political activists don’t have to manage company money. NetEnt knows this, which is why they’re not at 50/50, and unless men suddenly become the primary caregivers of children in Sweden at rates equal to women (which is fine but unlikely) they never will be at 50/50.
As for the good, NetEnt just keeps growing relentlessly. Operating profit is up 43.5% and nine new license agreements were signed with new customers just this quarter. Six new customers’ casinos were launched. Among the new signees were Gala Coral in the UK and Golden Nugget in New Jersey. There are already agreements with 26 new customers yet to launch, so growth looks all but assured for some time to come.
New agreements were reached with Betfair, bwin.party, and William Hill. NetEnt is not falling behind in the crucial mobile market by any means. Revenue share from mobile accounted for 28% in the third quarter, compared to 16% in Q3 last year. NetEnt is just all over the place and looks unstoppable. It still has zero net debt.
Just imagine what they’ll accomplish if only they actually had a 50/50 gender-balanced workforce. They’d break the warp barrier or something.
So once again, NetEnt is a class act, an almost perfect company if not for the monetary mischief of the actors that surround it. Can it go even higher? Sure. Nothing wrong with putting some change in and seeing how much you get in return, but keep it light.
