CD Projekt Red (CDR.WA) - Deep Dive #10
Long-lived, highly scalable IP assets with excellent returns on capital from my favorite video game developer: shooting for a double by 2028
CD Projekt Red (CDPR) is headquartered in Warsaw, Poland and reports in Polish Zloty (PLN). CDPR trades as CDR.WA on the Warsaw Exchange and OTGLY on OTC Markets.
Poland is known for many things.
Firstly, the country was one center of World War II’s European Theater, and the Polish Uprising was instrumental in tearing off the chains of communism that followed. Poland produces high quality vodka, delectable cuisine, and features the highest blood alcohol content ever recorded in an individual that survived, that being an astonishing 1.37% measured in 2013. On the global stage, Poland is also known as the home of one of the greatest game development studios of all time and the subject of today’s piece; CD Projekt Red (CDPR).
Since 2015’s release of The Witcher 3 (250x Game of the Year award winner), CDPR has grown from a small Polish developer into a relative international powerhouse. Since Cyberpunk 2077 released in 2020 and has picked up increasing traction in years since, it has become clear to me that CD Projekt Red is well on its way to becoming a much bigger deal. Both of these games are excellent and very well-loved, and with more releases slated for the coming years, I think the company is going to sell a lot of games and make a lot of money, more money than is currently reflected in the stock price today. The best theses are simple, as they say… but to get a bit more complex:
Thesis
CDPR today is a company that has historically made the bulk of its cash flows every 5 years or so. Witcher III in 2015, Cyberpunk 2077 in 2020, with smaller DLC releases in between. However between now and 2030-2031, these 5 releases are lined up (in estimated order): Witcher III 3rd DLC (rumored), Witcher IV, Witcher I Remake, a Witcher live-service game, and Cyberpunk 2. Most investors and the market itself find these stocks hard to value due to the massive cash flows that occur very infrequently — more consistent releases solves this issue.
I think CDPR’s upcoming releases, the Witcher IV, Witcher I Remake, Witcher Multiplayer Game, and Cyberpunk 2 are going to sell like hotcakes and generate loads of earnings for CDPR. Though releases are years away, I do not think the profitability of these games is priced in accurately today (skip to the bottom to see my forecast).
This company makes the best games I’ve ever played, having spent over 1,000 hours in the Witcher III and quickly accumulating 200+ hours in Cyberpunk 2077. These games are incredibly fun, addictive, and well worth their $60 price tags. I see that and so do the millions of other people who are going to keep buying these games.
High returns on capital: CDPR sports an average annual ROE >25%, with demonstrated potential for significant growth and expansion among the company’s IP franchises. The economics are nearly identical to SaaS besides the one-time purchase nature of video games, whereas SaaS is a subscription model; this dynamic makes a lot of sense and is very typical and even ideal in the video game industry.
CDR is relatively expensive today at over 40x TTM earnings, but if Witcher IV and it’s satellite games sell as well as I think they will, the company will see significant and continuing growth in future earnings that would reset the valuation towards the cheaper side for a company of this quality, within a few years. Currently the company is trading at around 15x analysts 2028 earnings estimates, which would be fairly cheap for a company of this quality and potential in my opinion. Essentially I think this is a double by 2028-29.
Coming within a few months is a ‘hidden catalyst’: a long rumored 3rd DLC for the Witcher 3 that is extremely likely to be released, yet not officially confirmed by the company. Judging by stock price action in recent days, the market doesn’t seem to care either, despite the fact that I believe this DLC will increase both 2026 revenue and EBIT by >20% compared to 2025, leading up to the release of Witcher IV expected in 2027.
Risks
Game delays are a big risk, along with botched releases a la Cyberpunk 2077 in 2020 (see the Cyberpunk 2077 section). Games can be delayed for any number of reasons and the market usually doesn’t like that news, though prices recover upon release. If you hold this stock it would be rational to anticipate a delay in any game, just in case.
Computer hardware prices; as games become more advanced, so too do gaming hardware requirements. Unfortunately, at the moment gaming hardware prices (RAM, Memory, GPUs) are wildly inflated due to AI compute demand, which may make it more difficult for consumers to purchase the equipment necessary to play next-gen games. CDPR has put forth a tech demo of Witcher IV running on a standard PS5, so this may not be so much of an issue.
Execution risk: naturally, if a game is going to sell well, it needs to be good. Crazy concept, I know… historically CDPR has been excellent at making games that are simply amazing. They’ve got the sauce and they’re cooking up a storm. However, there is always the risk that the team runs out of ideas, or they execute a release poorly, or they do something else to irk the playerbase, which would hurt sales and profitability. I think CDPR thus far has been a shining example of what it means to do right by your customers — lets hope they can continue that strength over the next release cycle.
Now that we’ve covered the Thesis and Risks, lets do a bit more analysis! I’ll run through CDPR’s IP assets (game franchises) and how much money I think they can earn from future releases.
The Witcher III: Wild Hunt
“With less than half the size of Rockstar’s team from GTA, and with far less of a budget, what has been done here is nothing short of amazing. — The Angry Joe Show on Witcher III
The Witcher III: Wild Hunt, released in 2015, is one of the greatest and highest respected games ever released. As you read this, there are likely 10-15,000 people still playing the Witcher III, after 10 years.
A true ‘timeless masterpiece’ with 760,000+ positive reviews, and a total reviews score of overwhelmingly positive on Steam
Won Game of the Year (GOTY) at The Game Awards in 2015, along with numerous other awards — putting it up there with other fantasy RPG titles such as God of War and Elden Ring among the best RPGs ever released
Sold over 60 million copies since 2015 release, not including its 2 DLCs, generating over $2.4Bn Polish Zloty in revenue
Currently ranked at #8 on the list of the best selling video games of all time (Wikipedia), outselling even the original Super Mario Bros released in 1985.
I can personally confirm that The Witcher III is an amazing game. I’m about to go play some more after publishing this piece, in fact. I have over 1,000 hours in the game, and I’ve bought it multiple times across consoles and my PC. Truly, it’s just fantastic, and it holds up impressively well these days even at it’s old age.
The Witcher universe is deep and well fleshed-out. Before CDPR published its three Witcher games, the franchise began when Polish author Andrzej Sapkowski wrote eight fantasy literature novels and three short story collections set in the Witcher universe through the 1990s-2000. In 2002, CD Projekt Red purchased the IP and released the first Witcher game, Witcher I, in 2007 to critical acclaim.
CDPR released the Witcher II: Assassins of Kings in 2011, and finally capped off the trilogy with The Witcher III: Wild Hunt in 2015. All three of these games have received critical acclaim and are generally beloved, but the Witcher III is the highest selling and most ambitious title in the saga by far.
Netflix even wanted a piece of the action, with the release of a Witcher Netflix show in 2020, starring Henry Cavill as Geralt, the main protagonist of the Witcher universe. Netflix has published three seasons of this show so far, with two more seasons in the works, primarily based on Andrzej Sapkowski’s short stories and under license from the author. Clearly, people like this universe and want more.
All this to say, the Witcher universe is one of the most recognizable that exists among video game franchises. Between three games, many books, and soon to be five seasons of a Netflix show, its safe to say that this IP is enormously popular and very well known across the globe.
This popularity is important as CDPR plans to continue expanding the Witcher universe with a new trilogy-saga of three more games — the first of these is Witcher IV, which I’ll cover in detail below. This game and other ‘satellite’ games in the Witcher universe are a large part of the long-term bull case for this company.
Cyberpunk 2077
Cyberpunk 2077, released in 2020, was a massively ambitious and groundbreaking title that ended up biting off more than it could chew, in a big way. On launch the game was plagued by bugs and glitches and in many cases it was almost physically impossible to run the game on consoles.
The Cyberpunk release was so troublesome and issue-prone on consoles specifically, that Sony removed the game from the Playstation store (which could have seen ~10-20% of potential sales) one week after release, and the game was not reinstated until six months later.
These early sales are extremely important for earnings, as games are typically never discounted upon release, when the bulk of purchases occur. Cyberpunk sold 10 million copies, nearly 1/3 of the units it’s sold to date, in its first ten days. Only after hype from a release dies down do developers begin participating in regular seasonal sales events like the currently ongoing Steam Winter Sale, where games across the board are discounted as much as 50% to drive continued revenue. If not marred by technical issues, Cyberpunk could have sold millions more copies at full price.
Despite all the issues and the bad press (which they received plenty of), and despite the 30,000 refunds offered (which only cost the company a few million USD), Cyberpunk still sold nearly 14 million copies within a few weeks. The game was pretty rough at launch, and everyone still bought it anyway.
In defense of the developers, COVID hit about 8 months before the game was set to release, right during crunch time. Teams had to begin working from home and cohesiveness was decreased between developers, I’m sure that didn’t help the release any and COVID was fully out of the developer’s control.
Fortunately, CD Project Red has spent years fixing and massively improving Cyberpunk 2077, which has led to a second wind for the game and massively increased sales in recent years as more and more players discover what an amazing game Cyberpunk 2077 is.
They poured a lot of time into bug fixes and patches, releasing a free next-gen edition of the game that addressed numerous issues, and releasing multiple free DLCs to all players in addition to the amazing $30 Phantom Liberty DLC which added almost an entire game’s worth of new content and has sold 10 million units to date. Today, the game is significantly improved and that shows up in the sales figures through 2023 (and beyond), selling over 30 million base-game copies:
I want to mention how strong this game is coming back — I absolutely love it and I consume a fair bit of content about it, and I measure what people are saying and how many other people are engaging with the content. I think this game is an instant classic and people know it. People are addicted to running and re-running this game, experimenting with new builds, playing different missions, living a new life in-game. The cultural impact is so impressive that other forms of media, the CDPR-directed Netflix anime Cyberpunk Edgerunners as well as numerous in-game songs released on Spotify, have been viewed and played hundreds of millions of times collectively.
Eventually, likely past 2030, Cyberpunk 2 will be released and it is likely going to sell fantastically given the massive and enduring popularity of Cyberpunk today. There are already 135 developers working on CP2, and CDPR plans to dramatically scale up investment in the coming years.
Witcher Multiplayer Game (Project Sirius)
CDPR’s Boston-based development subsidiary The Molasses Flood is engaged in the development of a multiplayer title from the Witcher universe, that is intended to have a broader reach than the Witcher singleplayer games. This means different gameplay loops, a different structure, and likely a lower price tag. The Molasses Flood has listed job postings that require live-service experience, which suggests that this will be a live-service game, as live-service and multiplayer go hand-in-hand in many cases.
Live-service games have a different selling cycle than CDR’s typical games. Where a typical singleplayer game comes with all it’s story and non-DLC content at launch generally, live-service games continue to evolve in a live fashion after release.
A great example of this tactic could be Helldivers 2, released in 2024 — this is a multiplayer PVE (player vs. environment) game that cost $40 to buy at launch, but over time the developers evolve and change the story of the game, and change how players interact with the Helldivers world continually on a constant basis.
Helldivers 2 developers are also continually releasing new paid content — not only is there a virtual credits system to purchase in-game content in exchange for dollars or other real-life currencies, but they are also continually releasing ‘Warbonds’, collections of exclusive and shiny new content that users must purchase independently from the original game. All this just works to extend the sales lifetime of the game well beyond it’s initial release.
Thus, I’m imagining that a live-service Witcher game won’t be as nitty gritty and in the details with worldbuilding and story elements as the Witcher III, and it will likely have simpler and more repeatable gameplay loops on the multiplayer side, but with a lower scope and a lower price tag as is typical for games like this, it should have a much broader appeal. The use of a live-service model, though not officially confirmed, could enable CDR to monetize the game more than a singleplayer title for years and years after its initial release.
The Witcher online game is expected to have singleplayer elements as well, with a fully fleshed out singeplayer campaign and various new quests and content for players to explore.
After the Witcher IV is released, CDR will have more development capacity to focus on this multiplayer title as well as the Witcher I Remake I’ll mention below. Therefore, I expect this title to be released between 2028 and 2029, as the Witcher IV is currently expected in 2027. Though keep in mind, all of these development times could be pushed out a year or two, realistically.
The Witcher Remake (Project Canis Majoris)
CDR is also engaging in the development of a remake of it’s first Witcher game, the Witcher I. This game was released in 2007, and though it’s still widely regarded as a great game, it is severely dated by old technology and lowered capabilities.
The Witcher Remake is developed primarily through a partnership with Fool’s Theory, an independent development studio led and staffed by multiple former Witcher III developers under CD Projekt Red. Fool’s Theory is also the studio working on the coming 3rd DLC for The Witcher III.
This remake will be much more technically capable than the first game, and it is very likely to feature much more content, a more fleshed out world, new storylines, and some changes to outdated content from Witcher I. It will likely be a fully-fleshed out title similar in scale to the Witcher III, with a triple-A price tag.
CD Projekt Red is maintaining IP rights and working closely with Fool’s Theory to ensure creative coherence between the two teams, though it is unclear exactly how or if revenue will be split between the two studios at release. As CDR has rights to the primary IP, it’s likely that Fool’s Theory will take a smaller cut of sales, or perhaps simply be paid for their development work.
The Witcher I remake is expected to release after Witcher IV again, just as the multiplayer title will, likely in the 2028-2030 range.
Financials: Growth, Margins, Capital Returns
Here you can see the impact of improvements to Cyberpunk 2077 and increases in sales in recent years.
CDR has doubled it’s average annual revenue in the four years post-release from $483mm zloty during 2016-2019, to over $1Bn zloty during 2021-2024, and I think the company has similar potential to pull this off again with the release of Witcher IV and its satellite games. During release years, obviously significantly more revenue is generated.
The chart above demonstrates the longer-term scalability of game franchises — each subsequent large release generates more and more revenue, as prior releases continue to generate smaller amounts of revenue through continual sales — short-run vs. long-run sales, basically. Short term sales are always much higher on an NPV basis, but long-term sales are sort of like free money and come at much higher margin because they are already finished games with no development costs.
In the 5-year period since 2020 (cyberpunk release year) they’ve seen an average ROE of 27.6%, driven largely by a massive 70% ratio in 2020 (Cyberpunk release) and from then a ratio ranging from the low teens to the low 20s annually. EBIT margins hover near 50% and cash flow margins can fluctuate between 30-80% during the release cycle.
Small note here, under IFRS the company includes depreciation of game assets in COGS, and they capitalize most video game development instead of expensing it in R&D — as a result their gross and FCF margins are a bit lower than your average American software company would calculate them, though of course they still post excellent metrics.
CDPR has shown impressive growth as well as impressive profitability over the company’s previous 5-7 year game release cycle:
I know what you are probably wondering; how is capital managed? It’s one thing to make a lot of money selling games, and another thing entirely to give the market just enough cash to ensure your stock actually goes up.
CDPR pays a 1 PLN regular annual dividend, but during release years such as 2020 that dividend can massively increase, when the company earned 11.45 PLN per share and paid a 5 PLN dividend, just over a 40% payout ratio — that’s really not bad. The company does not repurchase shares, but they don’t dilute either, with a constant 100 million shares outstanding.
As long as some of the capital earned is being returned, I think the market will recognize the profitability and growth potential this studio has to offer and buy up the stock. I am certain they will increase the dividend in proportion with their future earnings.
CDPR has negligible debt and maintains a cash + short-term investments balance of 977mm PLN ($270mm USD) as of their Q3 earnings release. One simplification note, I am valuing the company on EV/EBIT given their large cash position and the fact that this is software. As of recent quarters, EBIT can be used as a proxy for earnings because the interest income the company earns on cash more than negates income taxes, which makes it even easier to apply EV/EBIT multiples in valuation.
Additionally on tax, the Polish government subsidizes the gaming sector via tax credits. There was a time when CDPR was the largest stock listed on Poland’s Warsaw Exchange Index, and the Polish gaming industry is responsible for a surprising number very popular and well-selling games. These studios create well paying jobs in art, design, and software engineering as well, hence the subsidies. So again, if you count interest income and tax credits, CDPR effectively pays no taxes on its core earnings.
Additionally, CDPR recently sold it’s subsidiary GOG.com, which was a discount online game distributor, a competitor to Steam — but not a very good one. GOG brought in around 200mm PLN in annual sales recently, though it was barely contributing to operating profit with only a few million PLN in segment EBIT annually — a breakeven business, almost a charity project in a lot of respects.
Anyway, the unit was sold to a co-founder of the studio for 90mm PLN, which I think is a fair deal given the pretty low profitability. My projections going forward lack the revenue of GOG, but the resulting total profit is at higher overall margins without GOG dragging those down. I like this move toward streamlining earnings and reducing operating and corporate complexity.
The Crux of it all; How much could Witcher IV Sell?
I think Witcher IV sells 21-23 million copies in year one, and I do not think it will be plagued with nearly as many technical issues on launch as Cyberpunk was (I hope). Cyberpunk may have been a pretty big flop, but it still sold nearly 14 million units in year one, despite its massively curtailed audience reception and release troubles that included the game not being available to play on the PS4 whatsoever for six months in a row. If Witcher IV can avoid these problems, which I think is likely, it has ample room to sell much better than Cyberpunk did. My reasoning is below:
It’s a pre-existing IP. Cyberpunk was an entirely new world, so it would make sense that it would be trickier to develop with completely new worldbuilding, new concepts, new characters, etc. The Witcher IV, on the other hand, is the 4th installment in a world that is already deeply fleshed out. It should be a less intensive development cycle overall to make the Witcher IV as opposed to Cyberpunk 2077.
Cyberpunk was developed on the proprietary REDEngine, a homemade game engine that was built specifically to support Cyberpunk’s technical requirements. The Witcher IV, however, will be developed on the Unreal Engine 5 game engine (UE5), which will likely simplify the development process. UE5 is a game-changer (pun not intended) for developers given its many powerful tools, and CDPR doesn’t need to build a whole new engine for Witcher IV, or support it technically, or update it regularly (those functions behind handled by Epic Games, the owners of UE5).
CDPR is conducting performance testing on consoles much earlier in the development lifecycle than Cyberpunk did — the company has already released tech demos of the game running perfectly smoothly with truly jaw-dropping graphics on unmodified PlayStation 5, which is extremely impressive. It’s important to note that tech demos are not the real game, they’re just little demonstrations made from would-be game assets, so the actual game may differ in performance, but this is a promising early sign.
This means that Witcher 4 is likely to have a shorter development cycle than Cyberpunk 2077 and it will likely launch in a much better state. The only drawback of using UE5 is that the engine takes a 5% royalty on sales once the game launches.
Beyond this, you might think that 20+ million unit sales is high — let me justify it a bit. Witcher III is, I repeat, the 8th best selling game of all time with 60 million + copies sold. Witcher IV will have been 12 years in the making, a highly anticipated new installment that everyone and their mother is going to buy — every Witcher fan, every Cyberpunk fan, and a whole bunch of new fans. If a combined 90 million purchases of this studio’s games have occurred in the last 12 years, I think their highest-anticipated release yet could get 20 million or more.
Let’s put it all together.
22 million Witcher IV copies sold at an average of $50 (release sales + seasonal discount sales) is $1.1Bn USD in sales, at a 50% margin is $550mm in earnings by 2027-2028… for a company with an EV today of around $6.4Bn, you can see how that gets pretty cheap upon release.
But we’re not just waiting for Witcher IV, but 3+ other games. Here’s where I see things shaking out through 2031:
And in chart form:
These estimates include platform distribution fees (Steam, Xbox, PlayStation) and UE5 fees. For pricing, I include discounts (sales events), and units sold includes my best estimate of sales trends — I looked at some pretty granular data from Steam as well as reconstructed data on unit sales by year, but part of this is my own guesses. Obviously, this forecast will not play out exactly as I think it could, but I am hoping this ends up being reasonably accurate.
Either way, I think a multiple of 10x current EV / projected EBIT for these coming years is dramatically too cheap, for the consistent growth and high profitability of these well-made game franchises, I’d bargain for at least a 20x multiple — I essentially think the stock doubles by the 2027-28 release period. I own an 8.5% position in CDR.WA at cost of 260.9 PLN and am heavily considering adding to my position on dips.
Good luck and happy investing as always friends!
Good write up but I'd push out Witcher 4 to 2028 at the earliest
Great writeup and great stock! Agreed this looks like at least a double if they can execute cleanly