On Monday, Square Enix Holdings (9684:JP) (OTC: SQNNY) stock was downgraded by Jefferies from Hold to Underperform. The firm also adjusted its price target to JPY4,460.00 from the previous JPY4,600.00.
The downgrade followed a significant rise in the company's share price, which the analyst believes has led to an overvaluation, particularly after the release and performance of the company's projects.
The analyst pointed out that the decision to downgrade came after the stock's price increased by 22% over the past three months, reaching JPY5,500. This increase occurred after the expansion of Final Fantasy XIV (FF14), which had been anticipated as a positive development for the company. However, with the expansion now in the past, concerns have been raised about the company's valuation and the disappointing launch of Visions of Mana.
Jefferies had previously downgraded Square Enix to Underperform on May 13 when the stock was at JPY6,300, following the company's financial results. The stock then declined, hitting a low that aligned with Jefferies' price target of JPY4,600 by May 29, prompting an upgrade to Hold due to a more balanced risk-reward outlook at that time. The FF14 expansion pack was expected to act as a positive catalyst, which was reflected in the stock's subsequent performance.
Despite the recent price surge, the firm has expressed concerns over the company's current fiscal year price-to-earnings ratio (PER) of 20x, which stands above the peer average of 19x. This higher valuation is seen as particularly concerning given Square Enix's low growth prospects and execution issues, leading to the lowered price target and rating downgrade.
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