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Why Gravity Stock Was Up Almost 20% in May

By Jon Quast - Jun 8, 2021 at 4:52PM

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Financial results show a marked improvement in profitability. But now the company faces the challenge of growing beyond its core business.

What happened

Shares of South Korean video game company Gravity (GRVY 1.56%) were up 19.6% in May, according to data provided by S&P Global Market Intelligence. And this outperformance has continued into June, with it up about another 8% as of this writing. Over this time, the stock's biggest jump came following the release of financial results for the first quarter of 2021.

So what

In Q1, Gravity generated revenue of roughly $93 million. This was up 43% year over year but down 6.6% from the previous quarter. This was the company's second consecutive quarter of a sequential decline in revenue. 

A person looks pleasantly surprised at what they see on the screen of their laptop.

Image source: Getty Images.

Last quarter, Gravity's stock fell when it reported a sequential drop in revenue because it also announced a drop in profits. But in Q1, Gravity grew its bottom line and that's why investors were pleased. The company had a net profit of around $21 million -- up 154% from last year and up 56% from last quarter. And it also had an operating profit of almost $25 million.

Now what

In 2020, a single mobile game -- Ragnarok M: Eternal Love -- accounted for a whopping 43.6% of Gravity's total revenue. The company may be growing revenue and profits -- that's good. But since it has so much concentration with one game, it's crucial for Gravity to launch new games as soon as possible. To that end, the company has several games in the pipeline, with Ragnarok Begins and The Lost Memories: a Song of Valkyrie slated to launch later this year.

There's no way to know if any of the new titles will be hits for Gravity. Furthermore, the company is launching games in new countries, and there's no way to know if it will find the same success there that it's enjoyed in its core markets. However, if I were a shareholder facing these uncertainties, I'd find a measure of comfort in one thing: Gravity's balance sheet.

As of Q1, Gravity has almost $104 million in cash and equivalents and another $69 million in short-term investments. Furthermore, it doesn't have any long-term debt. In short, Gravity is in a good financial position to fund expansion and launch new hit games going forward. But revenue and profits may be bumpy until it becomes more diversified. 

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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