Berenberg initiates coverage on Devolver Digital at 'hold'

Analysts at Berenberg initiated coverage on video games publisher Devolver Digital with a 'hold' rating and 180.0p target price on Wednesday, stating there appeared to be limited upside potential for the stock in the short- to medium-term.

Berenberg said Devolver's strong new title pipeline, increasing share of first-party IP and a growing back catalogue will drive one of the highest near-term underlying earnings growth outlooks in the sector.

However, the German bank also noted that Devolver trades at a 35% premium to its nearest peers, making it "one of the most expensive names in the sector".

"While we believe the quality of the business model and growth outlook warrants this premium, in our view it does limit upside potential at least in the short to medium term," said Berenberg.

The analysts stated they expect to see a "substantial margin expansion" from the group, stating it was plausible that Devolver's gross margin will trend towards 50% as its share of own IP grows which, given the high operating leverage, would drive meaningful upside to our margin expectations.

Berenberg added that mergers and acquisitions were also expected to provide a boost for the stock, with the firm likely to use M&A to grow development capacity, as well as add first-party IP.