“Slower than expected” sales

At the time of writing, the share price of video game developer Frontier Developments (LSE: DEV) has tumbled almost 43% in 2021 to date. This isn’t a complete surprise.

Back on 22 November, Frontier announced that PC sales of its latest release — Jurassic World Evolution 2 — had been “slower than expected“, due to a “crowded release window“. That’s despite generally favourable reviews from critics and gamers alike.

Unfortunately, copies of another one of the firm’s titles — Elite Dangerous: Odyssey — haven’t been flying off the shelves either. As a result, Frontier is revising its guidance on full-year revenue to between £100m and £130m. That’s a significant reduction on the £130m-£150m once hoped for. A lot will depend on how the company fares over the run-up to Christmas, hence why investors are understandably skittish.

Opportunity knocks?

Could this be a great opportunity? Possibly. As the company itself notes, the arrival of the new Jurassic World Dominion movie next year could generate better demand for its latest release. There are also Frontier’s first F1 management and Warhammer games to look forward to. Demand for video games (and, consequently, video gaming stocks) could also return if further restrictions are brought in to tackle the Omicron variant.   

My issue with Frontier, however, remains its valuation. A P/E is 47 isn’t excessive compared to some tech-related shares. It is, however, very rich for a stock that depends on a small number of titles performing as expected.

Without a compelling margin of safety, Frontier stays on my watchlist for now. That said, further slippage in the share price could force my hand.

Another growth stock disappoints

Online bathroom-related products seller Victorian Plumbing (LSE: VIC) is another growth stock that’s crashing in 2021. Since hitting a high of almost 342p back in June, its value is now down over 70%. 

A good proportion of this fall came following last Thursday’s full-year numbers. Despite posting a 29% rise in revenue to just under £269m, investors were shaken by the company’s rather subdued outlook on trading as the UK home improvement/DIY boom shows signs of having run its course. This was a risk I raised not long after the firm’s IPO.

Does a slowdown in growth justify such an awful share price collapse? I’m not so sure. In fact, Victorian Plumbing shares could offer great value now, even if gross margins fall, as expected.

Barriers to entry aren’t exactly high, but Victorian should continue growing its already significant presence through a hefty marketing budget. Other attractions include a solid balance sheet and a strategy to target more trade customers going forward. Founder and CEO Mark Radcliffe also remains a major shareholder. This should make him even more determined to see the company recover. 

Like Frontier, Victorian Plumbing remains on my watchlist. However, a lot of bad news does look to be priced in. A bounce could be on the way if trading proves even slightly better than a now very pessimistic market is predicting.

For now, I’m letting the dust settle.

The post These UK growth stocks have crashed! Time to buy? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Frontier Developments. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

How’s it been doing?

It’s doing very well. Revenue moved 19% higher over the 12 months to the end of May, supported by many/most of us being confined to our homes. The £90.7m logged was a record for the company. A maiden contribution from Frontier Foundry — its label for third-party publishing — was another positive. 

All told, earnings before interest, tax, depreciation and amortisation (EBITDA) jumped 21% to £38.1m, lending great support for Frontier’s ‘launch and nurture’ strategy. This is where it releases a game and then updates it over time; the idea being that a player will become increasingly invested in a game and continue playing the title for years to come. To date, FDEV has four such franchises: Elite Dangerous, Planet Coaster, Jurassic World Evolution and Planet Zoo.

Can all this continue?

This growth stock’s next game — Jurassic World Evolution 2 — is due for release in early November in time for Christmas. Frontier Foundry will also release three titles in the current financial year (Lemnis Gate, FAR: Changing Tides and Warhammer 40,000: Chaos Gate — Daemonhunters). As a result, the mid-cap thinks revenue will come in somewhere between £130m to £150m. That’s a huge jump on today’s already great numbers.

It potentially gets even better the following year. In FY23, between £160m and £180m is expected thanks to contributions from its hotly-anticipated first Formula 1 management game and its Warhammer Age of Sigmar IP real-time strategy title. The latter is licenced from market darling and FTSE 250 constituent Games Workshop.

So, what are the risks?

One potential issue is that more casual gamers will want to do other things with their time post-pandemic. In this way, Frontier is no different from other lockdown winners such as Bloomsbury Publishing and musical instrument seller Gear4music. This is inevitable to some degree but its impact should not be discounted.

Another potential drawback is that earnings at any developer can fluctuate from year to year. This is usually due to the irregular release of games. Even if release dates were consistent, there’s a chance that a particular game won’t be popular. Moreover, a competitor could release something that generates higher interest. In this way, gaming is no different from the music or movie industries.

Even nailed-on winners can suffer teething issues. Frontier experienced this itself in the last year following the release of a bug-laden Elite Dangerous: Odyssey. Although things now seem to be fixed, the episode certainly did its reputation with gamers no favours. It might also explain why this growth stock has been quite volatile in recent months.

Considering these potential headwinds, Frontier’s forward P/E of 38 feels punchy, to say the least. Then again, I wouldn’t be surprised if a deep-pocketed suitor submitted a generous bid for the whole company at some point anyway. That’s exactly what happened to one of FDEV’s highly-rated peers earlier this year.

Cash rich

Potential obstacles aside, I remain positive about this UK growth stock. Backed with over £42m in net cash on the balance sheet, I reckon this is a cautious buy for my own portfolio. 

The post 1 UK growth stock I’d buy following today’s record results! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Frontier Developments. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Record sales!

According to Frontier, strong sales of games and downloadable content in what remained of the previous financial year (to 31 May) has helped bring revenue to roughly £91m. This is impressive for two reasons. First, it’s a record figure. Second, the company has managed this feat without any new franchise announcements. 

It gets even better for those invested. Today, CEO David Braben said Frontier plans to grow sales over the next financial year “by 50% above the record revenue just achieved.” This may sound fanciful. However, based on recent news, I think this target might actually be achieved. 

New games announced

Yesterday, Frontier announced it was working on a sequel to its immensely popular 2018 game, Jurassic World Evolution. The dinosaur park management simulation is currently scheduled for release this year. Featuring the voices of actors from the related Hollywood movies, the game will be available on all major platforms.

But Frontier’s line-up for FY22 doesn’t end there. Having been launched on PC, the mid-cap will also bring its space simulation game Elite Dangerous: Odyssey to Playstation and Xbox consoles also this year. On top of this, “at least three new titles” from partner studios will be released via the firm’s publishing label Frontier Foundry. These include Warhammer: Chaos Gate – Daemonhunters, based on the franchise owned by Games Workshop.

Naturally, all this should do no harm to the UK growth stock’s top line. Revenue projections for FY23 now range £130m-£150m. This rises again to £160m-£180m, based on additional titles hitting the shelves.

Not all rosy

Despite this impressive schedule, today’s statement also served as a reminder that Frontier isn’t immune to setbacks. The need for staff to work from home over the last year delayed the release of the aforementioned Elite Dangerous: Odyssey. Unfortunately, this isn’t an isolated case. The release of the F1 management game had now been put back to after 1 June 2022.

There are other potential headaches. Games encounter problems even after they’ve been let loose. Back in May, the company had to spend 36 hours fixing a fault on its latest title that prevented some players from getting their gaming fix. At such a pivotal point in a game’s lifecycle, that’s clearly not ideal.

Factor in ongoing competition and an already-rich valuation and it’s perhaps no surprise that some investors were banking profit today. Despite sales and news on a highly-anticipated title, Frontier’s share price is down nearly 8%, as I type. 

Bottom line

Personally, I see this as an opportunity for me to climb on board. Gaming is already worth more than the music and movie sectors combined and I can’t see this popularity flagging in the years ahead. Indeed, along with automation, clean energy and electric vehicles, I suspect this sector will prove one of the key investing megatrends over the next decade.

As such, I’d be comfortable taking a stake in this UK growth stock now. Should the reversal in the share price continue, I’ll back up the truck.

The post 1 UK growth stock to buy now appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Games Workshop. The Motley Fool UK has recommended Frontier Developments. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Based on today’s interim results, I think further gains lie ahead.

Lockdown winner

No doubt about it – 2020 was a great year for Frontier. As one might expect, the number of people buying and playing its games rocketed due to lockdowns and coronavirus-related restrictions. Sales of Jurassic World Evolution and Elite Dangerous, for example, both passed the 4m sales mark.

This, or course, has had a hugely positive impact on Frontier’s top line. Revenue for the six months to the end of November came in at £36.9m — a 15% improvement on the £32m achieved over the same period in 2019.

Assuming all goes well, Frontier believes full-year revenue will come in somewhere between £90m and £95m. I think there are several reasons to be optimistic this target will be hit. 

Reasons to be bullish

For one, all of £1.3bn-cap’s titles have continued to attract players since the end of the reporting period, at least according to the company. Revenue in December — traditionally the best month for video game sales — was “stronger than expected,” Frontier said today. The release of new title Elite Dangerous: Odyssey before the end of the financial year should help boost revenue further.

The recent news on Xbox sales from Microsoft also bodes extremely well and is further evidence, in my view, that video gaming and esports could be one of the investment themes of the decade.

Aside from its growing portfolio, Frontier also looks to be in rude financial health. The company had almost £35m in net cash at the end of November. 

This isn’t to say, however, investing now in this great UK growth stock isn’t without risk. 

What are the risks?

One potential snag is the possibility of new games being delayed by the pandemic. On this, Frontier already has form. Last month, the company announced the Playstation and Xbox versions of Elite Dangerous: Odyssey wouldn’t now arrive until FY22. While understandable given the challenges of remote working, there’s a chance the share price could take a knock if further delays are announced.

Aside from this, there are a few more general risks to consider. These include the possibility new game releases, just like ‘blockbuster’ movies, may flop. A loosening of lockdown restrictions could also see more players temporarily putting down their controllers to escape outdoors.

Lastly, there’s the frothy valuation. Changing hands for a whopping 72 times forecast earnings before markets opened, it could be said  a lot of good news is already priced in. The fact that the shares are down, as I type, would support this argument. 

So, while I’m certainly bullish on Frontier’s outlook, I don’t expect capital gains will be quite so rapid in the next five years as they’ve been since 2016.

If I were to buy now, I’d ensure the rest of my cash was nicely spread across a range to top UK growth stocks before doing so.

The post This UK growth stock has soared in value. I think there could be more to come! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Frontier Developments. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The latest bid is for gaming developer Codemasters. It has received an offer from US titan Electronic Arts. If accepted, holders will receive 604p per share. That’s a big improvement on the 485p recently offered by rival Take-Two. The fact that Codemasters’ price is already at 654p, however, suggests a counter-bid may be forthcoming!

This has made me wonder which UK shares might be next to receive bids. Here are three that spring to mind. But I’d never buy a share just in the hope of its being bought. These are all shares I think have strong appeal even without a takeover boost.

Frontier Developments

Sticking with gaming, Cambridge-based Frontier Developments (LSE: FDEV) could also be on larger players’ shopping lists. It’s the brains behind titles including Planet Zoo and Jurassic World: Evolution. 

But Frontier wouldn’t be sold for peanuts. Thanks to the popularity of gaming during lockdowns, the shares have soared 155% year-to-date. This gives the company a valuation of £1.2bn!

If the battle for Codemasters tells us anything, however, it’s that overseas gaming giants will pay up to steal a march on competitors. Perhaps Chinese internet giant Tencent may wish to make a bid. It does already own almost 9% of Frontier. 

Regardless of whether this happens, I wouldn’t be surprised if there’s further consolidation in the gaming industry in 2021. With eSports looking set to be one of the investing themes of the next decade, it’s surely only a matter of time before other UK shares get taken out. 

Avon Rubber

Another firm that could find itself an opportunistic bid target before long is body-armour builder Avon Rubber (LSE: AVON). It’s a lot cheaper now than it was at the beginning of last week.

As fellow Fool Royston Wild covered in detail, Avon’s share price tumbled by 14% last Thursday on news that product approval relating to two contracts had been delayed. A protest had also been made relating to another contract. 

As a one-time holder of the stock, I’d be sorry to see a firm like Avon acquired by an overseas bidder. Nevertheless, I can see the appeal. Here’s a high-quality firm in a niche market with bulletproof finances.

Regardless of takeover speculation on my part, I may need to seriously consider welcoming Avon back to my portfolio if it drops much further. The share price fell another 7% on Friday and now trades at just two-thirds of the valuation it had at the beginning of December.

ITV

No takeover talk is complete without mentioning FTSE 250 member ITV (LSE: ITV). The Love Island producer has had a target on its back since Sky was bought in 2018.

The attractions of ITV aren’t hard to fathom. In addition to its various channels, the broadcaster has its very successful Studios division. It’s also entered the streaming market with its BritBox offering as part of its digital transformation.

If a potential suitor wants a cracking deal, they need to show their hand soon. Should advertising revenue pick up in 2021 with dividends reinstated, ITV could be on its way back to the FTSE 100. The shares are already up 50% since early November!

If a deal happens, my money’s on telecoms company Liberty Global. It owns 10% of ITV already.

The post Takeover targets? I think these could be the best UK shares to buy now! appeared first on The Twelfth Magpie.

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• With dividend yields averaging above 7%, are these 2 UK shares worth considering?

Paul Summers owns shares of ITV. The Motley Fool UK has recommended Avon Rubber, Frontier Developments, and ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Let’s look at three examples.

Growing at a fair clip

Last week’s record full-year results from logistics firm Clipper Logistics (LSE: CLG) were lapped up by the market and understandably so. 

New frontiers

Another company doing very well for investors is videogames developer Frontier Developments (LSE: FDEV). Last Friday’s update sent the share price to an all-time high and, again, it’s easy to see why.

Having met sales expectations so far in the financial year, Frontier now believes it will deliver revenue “within the top half of the current range of analyst projections” (between £83m and £95m). At least some of this will be generated from the slate of releases due between now and the end of May 2021. 

Jurassic World Evolution will hit the Nintendo Switch in November. Two other titles – Lemnis Gate and Struggling – are being launched under the Frontier’s new label for third-party publishing (Frontier Foundry). This part of the company forms a big part of its strategy over the next few years.

In addition to this, there will be updates to existing titles: Elite Dangerous, Planet Coaster, and Planet Zoo. 

Frontier’s shares now trade on an eye-watering 61 times earnings. That’s too high for me (even for a growth share) but it could be one to pick up on general market weakness. 

Hot stock

I’ve covered kettle safety control manufacturer Strix (LSE: KETL) quite a few times now. I can’t resist drawing attention to the small-cap once again. Since April, its shares have been on the boil, rising almost 90%.

In July, Strix reported that performance over the first six months of 2020 had been “resilient“. A “marked recovery” in June coupled with a strong order book means it expects to report similar profits to those achieved last year. That’s not a bad outcome considering the supply side disruption it faced earlier in the year when factories in China needed to shut.

Highly cash generative, Strix continues to reduce its debt pile. At the end of June, net debt stood at just under £37m. Due to cost-cutting, this was roughly £6m lower than originally targeted.

Once a bargain, the stock now trades on a P/E of 16. With 14 new products due for launch this year, however, I can still see it moving higher. There’s a forecast yield of 3.5% to boot. 

The post Forget the stock market crash. I found 3 UK growth shares that have been flying! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares of Strix Group. The Motley Fool UK has recommended Clipper Logistics and Frontier Developments. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

eSports: here to stay

You probably don’t need me to tell you that the lockdowns in 2020 have been hugely beneficial to raising the profile of gaming and eSports. With nowhere to go, huge swathes of people (re)discovered their inner gamer to pass the time and make new, digital contacts. If they weren’t playing themselves, they were watching other people do so via streaming service Twitch.

This rapid acceptance and adoption should mean the gaming-related boom keeps going even when the pandemic is over. It’s already been estimated that the global eSports audience will hit 495 million people in 2020.

Other developments that highlight eSports’ growing profile include the involvement of bookmakers. With no opportunities for punters to gamble on ‘traditional’ sports, firms such as William Hill have been taking bets on the outcomes of gaming matches.

Another sign of the times was the launch of talent development company Guild Esports in June. Co-owned by David Beckham, its goal is to find and nurture the next generation of professional players. While certainly not guaranteed to succeed, Beckham joins a growing list of sports stars such as Michael Jordan and Mike Tyson making investments in the video gaming industry. 

Here’s how you can join them.

How to invest

The most direct route into gaming as an investor is to buy a developer. UK-listed candidates include Codemasters, Frontier Developments and Team 17. Another option is ‘picks and shovels’ company Keywords Studios. It specialises in providing a variety of services to the video games industry. 

All of the above appear to be decent businesses with solid futures. The problem, however, is that most trade on frothy valuations due to the recent post-crash buying frenzy seen in the market.

Keywords-excluded, owning shares in a single, gaming-related company can also be risky. Much like a movie studio, a lot of money may rest on a new title living up to the hype. Should it not, some holders won’t hesitate to dump their stock.

Personally, I’m taking a different route.

My preferred pick

The VanEck Vectors Video Gaming and eSports UCITS ETF launched just over one year ago. Tracking the MVIS Global Video Gaming and eSports Index, it gives exposure to 25 companies. Importantly, all of these generate more than 50% of their revenue from the industry. Portfolio holdings include giants such as Nintendo and Tencent. Developer Activision Blizzard also features, as does Electronic Arts.

Based on performance so far, the 0.55% ongoing fee certainly doesn’t seem excessive. From inception (24 June 2019) to the end of July 2020, the fund’s net asset value climbed an astonishing 63%!

Buyer beware

Of course, no investment is a nailed-on home run. There will be setbacks along the way, perhaps in the form of increased regulation. The threat posed by cybercriminals shouldn’t be easily dismissed either. 

With a young, global, increasingly-affluent audience and new consoles (Playstation 5 and Xbox Series X) coming soon, however, the outlook for this coronavirus-proof industry looks rosy. In fact, I think gaming/esports could prove to be one of the best investment themes of the decade.

The post I think eSports could make investors filthy rich. Here’s how I’m playing it appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in VanEck Vectors Video Gaming and eSports UCITS ETF. The Motley Fool UK owns shares of and has recommended Activision Blizzard. The Motley Fool UK has recommended Frontier Developments and recommends the following options: long January 2022 $75 calls on Activision Blizzard and short January 2022 $75 puts on Activision Blizzard. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Could this be a great contrarian buy? Not in my opinion. 

Steering clear of Cineworld

Cineworld was, of course, forced to close all its sites back in March in an effort to reduce the spread of Covid-19. While there’s now hope that restrictions will be lifted, things are very unlikely to return to normal soon. Indeed, the continuation of social distancing may even lead studios to postpone blockbuster releases until they can be sure of making a decent profit. They could even bypass the silver screen completely.

The huge reduction in ticket sales isn’t the only problem Cineworld has. Thanks to a questionable acquisition strategy, the company has an absolute shedload of debt on the balance sheet. Reducing this burden could prove very difficult. 

What’s more, the relentless rise in the popularity of streaming services, such as Amazon Prime and Netflix, and the quality of home entertainment systems these days makes me wonder whether cinemas will ever be as popular as they once were. Why go to the trouble of travelling to a cinema and sitting among strangers when you can replicate at least some of the experience in your own living room?

Taking all this into account, I just can’t see the road ahead being anything but rough for Cineworld and its shareholders. A valuation of just 4 times earnings may be enticing but feels fairly meaningless as things stand. 

For me, another part of the leisure sector looks a far safer bet, albeit at far higher valuations. 

A safer alternative

A clear beneficiary of lockdown has been gaming companies. With most of us stuck indoors, it’s no wonder this activity has become one of the most popular ways of passing the time. Today’s update from publisher Frontier Developments (LSE: FDEV) only serves as confirmation. 

The firm is behind four hugely popular games: Elite Dangerous, Planet Coaster, Jurassic World Evolution and, most recently, Planet Zoo. 

According to the company, demand for these titles has “continued to be high” over the last month. Sales of the aforementioned Planet Zoo, for example, passed the one million mark earlier in May, despite only being available since last November.

With revenue now likely to come in above the previous range of £65-73m, Frontier now expects operating profit for 2019/20 will be “materially ahead” of the previous estimate (roughly £11m-£13m). What a difference to Cineworld’s plight!

We’ll get another update on trading on 8 June. Nevertheless, CEO David Braben is already confident the company has “a bright future post-lockdown” and that new players will continue engaging with its games.

One drawback

As mentioned, the one issue with buying gaming stocks now is that most trade on (very) high valuations. Frontier’s shares were on an eye-watering P/E of 65 before this morning’s near-13% rise. As optimistic as I am on the company’s outlook, that’s too rich for me right now.

We may, or may not, get a repeat of March’s market crash. If the former, I know which of Cineworld and Frontier I’d feel more comfortable taking a stake in.

The post Forget Cineworld shares. This top growth stock looks a far better buy to me appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended FRONTIER DEVELOPMENTS PLC ORD 0.5P. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today, I’m looking at three great examples, all of which report to the market next month. 

Gaming for growth

Cambridge-based video games developer and publisher Frontier Developments (LSE: FDEV) releases interim results on 5 February. From a business perspective, I doubt those already holding have much to fear.

Earlier this month, the company indicated that total revenue for the six months to the end of November would be £32m – a 28% rise on that achieved over the second half of the previous financial year. That said, it’s worth mentioning that this would be significantly less than the near-£65m achieved over the same period in 2018, highlighting the extent to which sales in this industry can fluctuate according to when games are released.

Having “performed well” over the festive period (and based on the initial success of Planet Zoo – its fourth franchise), Frontier’s management now believes full-year sales will come in within analyst expectations of between £65m and £73m. 

Boasting a strong net cash position and rising returns on capital, this is the sort of company I’d usually get in line to buy. On an eye-watering forecast price-to-earnings ratio of 54, however, a lot of the good news looks firmly priced in.

With shares up 40% in just six months, I’m inclined to wait and see if results day brings out the profit-takers.

In a sweet spot

Another small-cap reporting next month (25 February) is chocolatier Hotel Chocolat (LSE: HOTC).

Like Frontier, the AIM-listed firm enjoyed a sweet 2019, with its share price soaring almost 60%. Hotel is also generating great sales momentum, announcing last week that total group revenue over the 13 weeks and 26 weeks to 29 December had climbed 11% and 14% respectively. 

The company is also growing its presence, both in the UK (nine new stores were opened over the second half of 2019) and abroad (four sites in the US and five in Japan). It boasts over 1.1 million active members in its VIP-Me scheme and is even targeting the vegan market with its new Nutmilk chocolate – deemed an “immediate hit” by management. 

Talk of “modestly higher” costs “due to inefficiencies in the supply chain” may explain why the shares took a temporary dive last week but I think it’s more to do with the valuation – a very steep 44 times earnings.

It’s a great business but I’m conscious that no stock is worth buying at any price, especially a high street retailer.

Cleaning up

A third small-cap showing great positive momentum of late is infection prevention and contamination control product manufacturer Tristel (LSE: TSTL).

December’s AGM statement from the Snailwell-based business was brief but highly encouraging for those already holding.

Thanks to contributions from recent acquisitions, management reported that pre-tax profit for the first half of the financial year would be “no less than £2.8m” (£2.4m was achieved over the same period in 2018).

This, combined with news that its push for regulatory approval for its products in the US was “progressing well” has only served to send the shares higher.

Like both Frontier and Hotel Chocolate, however, the valuation is looking frothy at 33 times forecast earnings. Having climbed 85% since November, I have my doubts about whether the stock can maintain its current momentum.

Half-year numbers will be confirmed on 24 February.

The post I think these 3 small-cap growth stocks are the real deal. But are they too expensive? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Hotel Chocolat. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here are two minnows that I think are worth keeping an eye on in February. 

Game on

£350m cap game developer and publisher Frontier Developments (LSE: FDEV) will report its interim financial results for the six months ended 30 November 2018 on 6 February. Based on this month’s trading update, management is likely to report “record” numbers thanks to the success of its third franchise — Jurassic World Evolution. 

The manage-your-own-dinosaur-park game has now sold in excess of 2 million units, most of which were downloaded rather than purchased from a shop. Elsewhere, Frontier’s other franchises, Elite Dangerous and Planet Coaster, “continue to perform well“.

Revenue of roughly £64m for the six-month period was mentioned, which would be a staggering 236% improvement on that recorded the previous year. In addition to selling more games, Frontier’s strategy of providing free updates and additional content (at a price) as a way of keeping people interested in the titles would appear to be paying off.  

As far as the full-year is concerned, management remains “comfortable” with market expectations on revenue falling between £75m and £88m and believes this “should exceed the mid-point of this range“. 

Having more than halved in value in seven months, you might think Frontier’s stock trades on a tempting valuation. Unfortunately, it’s still far from cheap on a little less than 22 times forecast earnings. There are no dividends to speak of either, so those holding must pin all their hopes on capital growth for now.

Nevertheless. CEO David Braben’s promise to provide more information on the company’s fourth game franchise “in the coming months” could be a catalyst for the shares to move higher. The fact that less than 50% of the stock is actually available to the public could also accentuate any upside. 

US-bound? 

Also worthy of further research, in my opinion, is small-cap infection-prevention, contamination control, and hygiene product manufacturer Tristel (LSE: TSTL). The company is due to release its interim results on 25 February. 

Based on comments made in December’s AGM, the small-cap expects to report pre-tax profit of “no less than” £2.2m for the first six months of its financial year (ending in June 2019) — 10% higher than in 2018. Importantly, this takes into account Tristel’s recent purchase of Benelux distributor Ecomed Group but only one month of the latter’s contribution to revenue and profits.  

Having climbed to as high as 342p last summer, the stock is now pretty much back to the price it was one year ago (275p). Like Frontier, however, Tristel is most definitely not a stock for value hunters.

A forecast price-to-earnings (P/E) ratio of 27 suggests a lot hinges on the company’s ability to build a presence in the US. The process of getting the necessary regulatory approval for its products is “progressing as planned“, according to CEO Paul Swinney,

Should approval be given, the upside could be huge. For now, however, you’ll need to pay a premium for a chance to enjoy that ride. 

The post 2 promising small-cap growth stocks worth watching in February appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.