Starbreeze Q1'26: Turnaround thesis lacks evidence

Starbreeze's Q1 results missed our already-cautious estimates on both revenue and profitability, with player engagement remaining weak despite recent game updates. We think the below-estimate outcome raises the uncertainty around the company's ability to achieve its stated goal of cash flow positivity in 2026 and suggests that the franchise stabilization we had cautiously anticipated is not yet materializing. With work-for-hire pipeline visibility limited and the cash runway narrowing, we believe Starbreeze is entering a critical execution period where missteps could quickly escalate into a balance sheet concern. While the recently announced partnerships are strategically sensible for long-term brand building, we believe they offer limited near-term financial relief, with the PAYDAY crossover in PUBG launching in Q2'26 standing out as the most concrete near-term test. We believe Starbreeze still has much to prove on execution before a more constructive scenario can be justified. We reiterate our Reduce recommendation while lowering our target price to SEK 0.08 (was SEK 0.09) on downgraded estimates.

Revenue mix weaker than expected despite KRAFTON tail providing some cushion

Starbreeze reported Q1 revenue of 27 MSEK (Q1’25: 68 MSEK), falling about 16% short of our 32 MSEK estimate. The sharp year-on-year decline was largely anticipated due to a tough comparison period that included PAYDAY 3's addition to PlayStation Plus and higher contributions from the KRAFTON work-for-hire partnership. The PAYDAY franchise delivered 21 MSEK (Inderes est.: 27 MSEK), with PD2 showing a notable q/q decline from the ~15 MSEK quarterly run-rate established in H2'25 following the subscription model rollout, while PD3 revenue remained at low levels. We think the muted revenue level, despite the progression system overhaul in late Q4, Q1 content drops, and overall game improvements, indicates that fundamental engagement challenges persist. Reported EBIT of -56 MSEK (Q1'25 adjusted: 1 MSEK) came in well below our -34 MSEK estimate, primarily due to, in addition to lower revenue, restructuring costs and higher-than-expected amortization. However, adjusted EBITDA reached 6 MSEK versus our -2 MSEK estimate, indicating the underlying OpEx trajectory is actually tracking slightly better than we had assumed.

Cash flow sustainability remains the critical question

We have revised our estimates downward following the Q1 miss, primarily reflecting a more cautious view on PD2's trajectory and higher amortization, partially offset by validation of Q4 cost measures. Our updated estimates stand at 143-140 MSEK revenue for FY26-27 (was 164-159 MSEK), with FY26 adj. EBIT of -99 MSEK (was -60 MSEK). We believe the company's 2026 cash flow positive target is looking increasingly challenging. While the full effect of Q4 rightsizing measures should materialize from Q3 onwards and provide sequential cost relief, the magnitude of the revenue headwind means any path to sustainable profitability remains heavily dependent on franchise execution, which has yet to show meaningful improvement.

Execution pressure intensifies as single-IP strategy is tested

We view the Q1 result confirming that Starbreeze is navigating a difficult transitional period, now operating largely as a single-IP studio following the work-for-hire wind-down with KRAFTON. While management has taken appropriate steps to rightsize the cost base and pursue strategic brand expansion, we believe the near-term investment case hinges almost entirely on the PAYDAY franchise delivering sustained improvement. Despite the low absolute valuation (2026e EV: ~140 MSEK, EV/S: 1.0x), we believe caution is warranted given the lack of concrete evidence of PD3 stabilization and the unclear path to cash flow sustainability. Our DCF-derived value per share of SEK 0.08 reflects a scenario where Starbreeze operates with a leaner cost base, stabilizes PAYDAY revenues, and secures either selective work-for-hire projects at reduced scope or modest contributions for strategic partnerships. Until we see sustained execution on franchise performance and cash flow improvement, we remain cautious on the investment case.