One example of this is the video games industry. While multiple lockdowns have proved a huge tailwind for games developers, the medium-to-long term outlook for this part of the market also looks very rosy indeed. 

Picks and shovels play

Video games services provider Keywords Studios (LSE: KWS) is one way of playing this trend. Just a minnow a few years ago, the Dublin-based business is now a multi-billion pound company. Clients include top dogs such as Nintendo and Microsoft.

Based on today’s trading update, I see no reason why this growth story is about to end. Keywords expects to report revenues of roughly €238m for the first six months of 2021. This would be a 37% increase on the same period last year, demonstrating that the company has bounced back well from the disruption caused by Covid-19. A “buoyant video games market” also saw adjusted pre-tax profit jump 80% to around €40m.

As you’d expect, shares command a high price. A P/E of 46 for FY21 looks punchy considering some parts of its business “continue to experience some COVID-19 related operational constraints.” Margins look set to be squeezed too as costs return following the lifting of restrictions. 

Investors may also be concerned by the departure of CEO Andrew Day. While not rudderless (joint interim CEOs are in place), the loss of someone who oversaw such dramatic growth is a blow.

Nevertheless, I think the rising trend for developers to outsource work to companies like Keywords, coupled with its acquisitive strategy, should help support growth going forward. As far as the latter’s concerned, the AIM-listed stock isn’t short of cash either. Keywords had €84m in its coffers at the end of the trading period. 

Another top growth stock

Of course, Keywords isn’t the only way of playing the rise and rise of video gaming. Publisher Team17 (LSE: TM17) is another growth stock I’ve been bullish on for some time. Its shares are up almost 260% since listing on AIM back in May 2018. 

Also reporting to the market today, TM17 said trading to June had been in line with management expectations. Having snapped up app developer StoryToys last month, the company said it entered the second half of 2021 “in great shape.“

Once again however, shares are pricey (44 times earnings). Such a valuation could come back to bite if the global economic recovery slows. In fact, I’d say Team17 was a more risky proposition than Keywords since the latter’s multiple clients arguably mean its earnings are better diversified.

Then again, I wonder if the TM17’s interest in educational titles sets it apart from the competition. Following on from last month’s news on Sumo Group, I also wouldn’t be surprised if the firm was in the sights of a deep-pocketed suitor.

Cautious buys

Whether it’s buying a picks and shovels play like Keywords, a publisher like Team 17, or a passive fund tracking the industry, I think it’s hard to ignore gaming as an investment theme. While undeniably pricey, I reckon these growth stocks could still be cautious buys at this level.

The post 2 UK growth stocks to buy now appeared first on The Twelfth Magpie.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Microsoft. The Motley Fool UK has recommended Keywords Studios. 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.

Notwithstanding this, I’m not as confident as some that the share price will continue to soar from here, at least in the near future.

Now, don’t get me wrong. Roblox’s chief pull — allowing players to create avatars that can move between games, all of which have been built by members of its own community — is attractive. When players can switch from creating a theme park to racing a car to starring in a fashion show, it’s perhaps no surprise Roblox is one of the biggest-grossing apps on Apple and Google devices.

Should this be the case, I think there’s a better way to play the gaming theme. 

Top UK growth stock 

Today’s full-year results from Dublin-based gaming services provider Keywords Studios (LSE: KWS) were as good as you might expect. Despite Covid-19 forcing many of the company’s employees to work from home, group revenue increased 14.4% to €373.5m. Pre-tax profit rose a whopping 86.6% to €32.5m. On top of this, Keywords ended the year with net cash (€102.9m), thanks in part to a successful €110m placing conducted in May.

The outlook for earnings looks just as good. As a result of new console launches (Playstation 5 and Xbox X/S Series), Keywords expects to see increased demand across its service lines “in 2021 and beyond.” Indeed, joint interim CEO Jon Hauck said the company was “very confident” in its future, thanks to “the continued trend towards outsourcing and an increased focus on content creation in a growing video games market.”

Buyer beware

All this surely bodes well for the KWS share price over the medium-to-long term. This isn’t to say there won’t be some volatility along the way. Although up more than 1,000% over the last five years, the KWS share price has suffered some not-insignificant reversals over this period. 

Like Roblox, there’s also the possibility that demand for the shares may moderate as investors grow wary that even the most committed gamers will want to get outside more over the next few months. These things matter when it’s considered that KWS shares already traded on a heady 38 times forecast earnings before markets opened this morning. 

Even so, I’d definitely feel more comfortable backing Keywords over Roblox. Aside from making real profits, the former is less focused on fickle young gamers. The ‘picks and shovels’ nature of its business also gives Keywords some earnings diversification that Roblox arguably doesn’t have. 

That said, I’m happy to continue funneling my money into this gaming-focused fund instead.

The post I’d buy this UK growth share ahead of Roblox appeared first on The Twelfth Magpie.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Alphabet (C shares) and Apple. The Motley Fool UK has recommended Keywords Studios and recommends the following options: short March 2023 $130 calls on Apple and long March 2023 $120 calls on Apple. 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.

A hidden growth opportunity in the gaming sector?

Keywords Studios (LSE:KWS) is a service provider for the video games industry. With multiple studios in its portfolio, the tech stock offers a wide range of services – including art & marketing, game development, audio, quality assurance, and localisation testing.

Today it serves 23 of the top 25 game developers across 60 countries around the world. This includes World of Warcraft developer Activision Blizzard, and Halo creator Microsoft.

Developing a video game today is an expensive process. If a project fails to meet expectations it can have serious financial consequences for studios. In order to minimise risk, most studios only retain a small team of permanent staff. The rest of the talent is provided by companies like Keywords Studios.

Recently, Keywords made two announcements that have re-affirmed my belief that the firm is on the right path.

This tech stock is beating expectations

The first was a quick trading update. Full-year revenue is expected to be in line with company guidance at €367m – a 12.5% increase on last year. Furthermore, the adjusted pre-tax profit is coming in 12% higher than expected at €52m.

Interestingly, the significant increase in pre-tax profit is primarily from improved operating margins as a result of a work-from-home policy. The reduced fixed costs may result in the policy remaining in place in some form even after the pandemic. If so, these margin improvements could remain as well.

Both figures continue to show that despite the disruptions from the Covid-19 pandemic, the firm has continued to thrive. With the next generation of consoles already sold out, it’s clear that the popularity of gaming isn’t declining. This suggests there’s an ever-increasing capacity for growth.

The studio is expanding!

Speaking of growth, the tech stock continued to execute its acquisition-based growth strategy. Keywords just added g-Net Media, an American marketing service provider, to its portfolio for $32m.

Founded in 2001, g-Net has been serving top entertainment companies – such as Netflix and Amazon Prime – as well as leading video game publishers. Both Activision Blizzard and Microsoft are among these, thus furthering the existing relationship these studios have with Keywords.

But, it’s important to remember that acquisitions always carry risk. g-Net, while well known within the industry, is still relatively small, with revenues of $16.3m for 2019. It’s good to see management acknowledge this and included specific terms in the buyout agreement. So far, only $18m has been paid using cash and shares. The remaining $14m is dependent on the studio meeting performance milestones.

The bottom line for this tech stock

The tech stock has yet to make any catastrophic errors in its acquisitions, and seeing performance-based terms in their buyout agreements lowers the risks involved. I believe this prudent approach to business, combined with the delivery of high-quality services, means Keywords Studios is on the path to exceptional growth for many years to come.

The post 1 tech stock I’d buy and hold forever appeared first on The Twelfth Magpie.

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Zaven Boyrazian owns shares in Keywords Studios. The Motley Fool UK has recommended Keywords Studios. 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.

In spite of today’s half-year results however, I still can’t be tempted. Quite the opposite, in fact.

“A half-year like no other”

Revenue jumped 53.2% to £717m over the six months to the end of September.  Broken down, sales in the UK moved 53.9% higher to £616.4m as people dashed to prepare for working from home. Although a much smaller part of its business, revenue from AO’s operations in Germany also climbed 85.2% to just over £100m.

At first glance, the bottom line looks even more encouraging. Pre-tax profit jumped no less than 417.1% to £18.3m following last year’s £5.9m loss. 

How much?!

Commenting on today’s results, CEO and founder John Roberts reflected that the six months of trading had been “a half-year like no other” and that AO’s market had changed “forever.”  

I completely agree. While I wouldn’t call time on the high street just yet, it does feel like online will become the dominant way to shop in the years ahead. Nevertheless, there remain a few reasons why I can’t be tempted to buy AO.  

The main problem, in my view, is the valuation. Despite being barely profitable, the market thinks AO is now worth a staggering £1.9bn.

To justify this price tag, I need it to be the go-to destination for UK shoppers in this space. Not only is this not the case, it’s also clear AO simply doesn’t have the financial firepower to compete with the likes of, say, US giant Amazon over the long term.

As good as today’s swing to profit was, there’s still net debt of £20.7m on the balance sheet. To put things in perspective, fellow online UK retailer Boohoo has net cash of £345m. Now, that’s a war chest!

With hopes the coronavirus storm may be over by next spring, I’m also inclined to think 2021 won’t be as kind to AO as management suspects. After all, laptops, washing machines or fridges aren’t weekly, monthly, or even annual purchases.

No, if I’m to pay up for a stock, I must feel confident that recent momentum will last. This is why I’d be more likely to buy video game services provider Keywords Studios (LSE: LWS) over AO World.

“Significantly ahead”

Today, the Dublin-based business revealed it now expects full-year adjusted pre-tax profit to come in “significantly ahead of the current market consensus,” at €52m. That’s down to continued strong trading and “good cost control.“ All the more impressive, considering the disruption caused by Covid-19 on production schedules for games. 

With the new Playstation 5 and Xbox consoles likely to be topping Christmas wishlists, I can see the good times continuing. Let’s not forget the exponential growth of eSports either!

Taking today’s gain into account, shares in Keywords are a little over 60% higher in value since the market crash. That’s nothing compared to AO World’s gains. But I know which business I’d be more comfortable owning.

After such a strong run, I’d be inclined to take profits on AO and run. 

The post This UK growth share is up over 700% since the market crash. I’d sell NOW! appeared first on The Twelfth Magpie.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers owns shares in boohoo group. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended boohoo group and Keywords Studios and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. 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.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
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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.

Revenues rose 9% to a record £40.2m in the first half of 2019 with adjusted pre-tax profit jumping 27% to £8.4m. Judges’ net cash pile also continues to grow, hitting £7.2m by the end of June compared to £700,000 at the end of 2018.

The firm had £20.8m in cash at the end of interim period — £5.1m more than at the end of December. And while the market minnow is unlikely to currently attract yield-hungry investors, the fact the interim dividend was hiked by no less than 25% today is indicative of just how confident management is in its future. 

Indeed, buoyed by recent business and a decent order book (despite what chairman Alex Hambro described as a “subdued second quarter“), management now predicts adjusted pre-tax profits and earnings per share for the full year will be ahead of previous analyst expectations of £15m and 188.4p, respectively.  

Having already climbed 42% in value so far in 2019, Judges’ shares are clearly not the bargain they once were. On 18 times forecast earnings before today’s upgrade, I still think they warrant attention once traders have realised some profit, especially as returns on capital and free cash flow are also going in the right direction. 

Revenue up, share price down

Also revealing interim numbers this morning was gaming services provider Keywords Studios (LSE: KWS) — a company that was propelled to mid-cap status when its share price multi-bagged between 2016 and 2018.

Here, revenue jumped a little under 40% to €153.2m, thanks to an increase in demand across all of the company’s service lines (and a rise in the number of clients buying 3 or more of said services).

Adjusted pre-tax profit climbed 14.3% to €18.4m, although gross margin fell slightly to 36.1% (from 37.4%) as a result of investment in its recruitment, training and facilities around the world. The latter is expected to bounce back in the second half as the company is able to grow capacity and offer new services.

Like Judges Scientific, Keywords also hiked its interim payout by double digits to 0.58p per share. Don’t get excited though – the 1.7p per share analysts expect for the full-year gives a yield of just 0.12%.

There’s been no let-up in the Dublin-based firm’s growth-by-acquisition strategy either, with four businesses purchased over the first half, and another (Berlin-headquartered TV Synchron) announced today. With net debt standing at just €9m, this spending spree is unlikely to end soon.

According to Keywords, trading in H2 so far has been encouraging with the board now predicting “strong organic revenue growth,” albeit a little slower than in H1, as some game developers wait for new games consoles due for release next year. That said, CEO Andrew Day said revenue would still be “at the upper end of current market expectations.”

Unfortunately, it would seem this wasn’t enough reassurance for some, with shares down almost 10% — further proof of just how unforgiving investors can be if companies on already punchy valuations in hot sectors do anything less than outperform (Keywords was trading on a forecast 29 times earnings).

The post This small-cap growth stock’s been flying in 2019 and I think there’s more to come appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the stocks mentioned. The Motley Fool UK has recommended Judges Scientific and Keywords Studios. 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.

Reassuringly expensive?

AIM-listed Craneware (LSE: CRW)  develops and licenses computer software for the US healthcare industry that helps hospital managers identify operational and financial risks. It’s a superb company based on its consistently great returns on capital, fat margins, lack of debt and market-leading status.

Unfortunately, holders rushed to sell a couple of months ago after it revealed a big drop in sales that would prevent it from meeting its full-year expectations. The slowdown has been attributed to teething problems relating to Craneware’s new cloud-based analytics platform (Trisus Health Intelligence). 

Having fallen 37% since late June, Craneware now occupies a place on my watchlist. While tempted to buy given the recent price weakness, I’m content to wait for full-year numbers on 3 September before potentially opening a position. The shares still change hands on a lofty 34 times forecast earnings for FY20, after all.

Also reporting next month is a former holding of mine — videogame services provider Keywords Studios (LSE: KWS).

The recent explosion of interest from investors in all-things gaming-related has proven a huge boon for the Dublin-headquartered business with its value soaring 400% from September 2016 to August 2018. Since then, however, the direction of its share price has been less predictable.  

This isn’t to say that Keywords isn’t doing well. In its most recent update, the firm stated that H1 revenue was likely to be around 39% higher at just over €153m thanks to “particularly strong growth” at its Functional Testing and Game Development divisions. Indeed, trading has been so good that the company has been required to expand at a faster rate than expected, requiring additional investment (although this is likely to benefit margins in H2). Adjusted pre-tax profit should come in 15% higher than the previous year at roughly €18.4m.

Perhaps the biggest concern with Keywords is its growth-by-acquisition strategy. This is fine when everything goes smoothly but could come under scrutiny if the firm shows signs of struggling to integrate new parts of its business. For now, the company trades on a steep valuation of 31 times earnings, leaving little room for error. Interim results are out on 18 September.

A final stock that updates next month (interim results, 3 September) is semiconductor wafer producer IQE (LSE: IQE) — another former holding of mine that, regrettably, proved far less successful than Keywords. 

IQE’s stock is currently the most expensive of the bunch at an eye-watering 55 times earnings. That said, analysts are forecasting a treble-digit rise in earnings per share in FY20. If the mid-cap were to achieve this, it would reduce the valuation to 21 based on today’s share price. 

I think this is optimistic, particularly as IQE is currently suffering as a result of the ongoing trade war between Donald Trump and China. It’s already told investors that full-year revenue for 2019 will miss forecasts.

Perhaps unsurprising, IQE remains popular with short-sellers. Worryingly, only Kier Group, AA, Thomas Cook and Wood Group are attracting more attention. That’s not a club any company wants to be a member of.  

Taking all this into account, I’d argue that IQE is the most at risk of crashing in September.

The post 3 highly-valued growth stocks I’d watch out for in September appeared first on The Twelfth Magpie.

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• 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 Craneware and Keywords Studios. 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.

Between 2016 and 2018, shares in the Dublin-base business almost ten-bagged in value — further evidence that finding promising stocks at the smaller end of the market spectrum can seriously grow your wealth over a short period of time. 

Since last September, however, the value of the company has dropped significantly. Despite a small bounce in recent weeks, the share price is still 35% down from its peak. 

As far as I can tell, most of this fall can be attributed to jittery investors jettisoning highly-rated growth stocks from their portfolios and little to do with how the company is performing.

Indeed, today’s full-year results revealed that Keywords continues to do very well. 

Positive outlook

Revenue jumped 66% to a little under €251m in 2018 as the company increased its market share and added new services such as marketing, music management, and predictive analytics. Adjusted pre-tax profit rose by almost the same percentage to €37.9m.

Further good news included a rise in return on capital employed (to a very solid 19.4%) and a 10% increase to the total dividend (to 1.61p).

The outlook was equally positive. 

Keywords stated that it had seen an “encouraging” start to 2019 (with trading in Q1 in line with expectations) and that it has achieved “significant new business gains” which included its first contract wins relating to game streaming.  

As far as the latter is concerned, CEO Andrew Day commented that “the likely increase in demand for content driven by the arrival of games subscription and streaming services from new entrants such as Apple and Google” bodes very well for the company.

Whether now is the right time to buy the stock is, however, less clear.

For one thing, the fairly apathetic reaction to today’s impressive figures implies that recent performance was already priced in. Before markets opened this morning, Keywords shares traded on a high valuation of 28 times forecast earnings.

It’s also worth noting that interest from short sellers has increased.

True, the 3.5% of stock currently being shorted isn’t as much as other growth-focused companies like IQE (7.9%), but it does appear that some are beginning to question whether the acquisition-led strategy the company pursues — and which shows no sign of slowing — could come back to haunt it later down the line.  

Driving profits higher

Of course, there are other options out there for investors looking to tap into the gaming industry as a way to increase their capital.

Developer and publisher Codemasters (LSE: CDM) released a cracking update last week. As a result of strong trading in H2, the small-cap is now expected to report full-year revenues of around £71m.

Even more encouragingly, adjusted earnings are now likely to be somewhere in the region of £18.5m — more than analysts were expecting — thanks in part to the release of driving game DiRT Rally 2.0 in February.

While Keywords offers more earnings diversification (in the sense that its success isn’t reliant on the popularity of a single game it works on), shares in Codemasters also trade on a lower valuation of 18 times forecast earnings.

Assuming the latter is able to grow profits as expected, one might reasonably argue that it represents a better buy at the current time. 

The post This top growth share is really performing. But is all the good news priced in? 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 Keywords Studios. 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.

Meanwhile, City analysts following the company expect earnings to grow by robust double-digit percentages in 2018 and 2019, and the compound annual growth rate for operating cash flow over the past few years runs close to 36%. Maybe Keywords Studios is worth its forward price-to-earnings ratio which, at today’s share price of 1,874p or so sits around 36 for 2019. I know that dismissing great companies on the grounds of a high valuation has kept me out of some seriously strong performers on the stock market in the past and one glance at the share price chart for Keyword Studios reveals how well it has done for its investors so far.

Consolidating the industry

The company claims to be “the leading” international technical services provider to the global video games industry. If ever there was a firm in the right place at the right time, I reckon Keyword Studios is it. Gaming is everywhere, and there’s no sign that the pursuit will be going out of fashion soon. But the market is highly fragmented, according to the directors, and a large element of the firm’s strategy involves the drive to consolidate it, as the firm’s vibrant acquisition programme demonstrates.

Operations span several trading areas. The interim report out today reveals that during the first six months of the year, 21% of revenue came from functional testing, 20% from localisation and translation services, 16% from art creation, 14% from player support, 12% from audio services, 9% from localisation testing, and 8% from engineering. These activities generate good business. Total currency-adjusted revenue for H1 came in at almost €110m, up 84% on last year, due to organic growth and a string of acquisitions in the period. The firm bought four companies over the past six months alone and announced the acquisition of Brighton-based The TrailerFarm Ltd today. Consolidation carries on apace, it seems.

A massive global market opportunity

The like-for-like revenue figure moved 8.6% higher, suggesting a good performance with organic growth, which I reckon we can assume is due to customers liking the firm’s offering. Meanwhile, adjusted earnings per share shot the lights out by moving up 53%. You’ve got to like the figures, and the directors seem to because they pushed up the interim dividend by 10% to celebrate.

The directors think the global market for video game software is $109bn (US) and should grow to $129bn by 2020. The size of the firm’s opportunity is immense. The growth plan works on the premise that there’s a “fundamental” imbalance between very large, global games companies and the “many hundreds” of small, highly-specialised service companies that support them “territory by territory.” Keyword Studios aims to sort out that imbalance and I wouldn’t bet against a good outcome for the firm’s investors from where we are now.

The post I reckon strong growth makes this mid-cap worth your serious attention appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Keywords Studios. 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.

More recently, however, this momentum has completely reversed, leaving Frontier’s stock trading 42% lower by the close of play yesterday. Based on today’s full-year figures, this drop isn’t entirely unexpected. 

Despite the “ongoing success” of its first two franchises (Elite Dangerous and Planet Coaster), total revenue dipped almost 9% to £34.2m in the year to the end of May. A combination of investment and a lack of a new franchise launch in the year meant that earnings before interest, tax, depreciation and amortisation (EBITDA) also fell — by 26% to £9.4m. 

Nevertheless, an eventual return to form for the share price looks likely.

The launch of its Jurassic World Evolution franchise in June appears to have gone extremely well. Cumulative sales passed the one million mark only five weeks after the digital launch, allowing Frontier to register “a record trading performance during the period from the year end.” As such, it’s perhaps no surprise that management is “comfortable” with analyst revenue forecasts of between £75m and £88m for the 2018/19 financial year.   

Longer-term, CEO David Braben remains bullish. He believes Frontier’s three franchises leave it “very well positioned” in the industry. A fourth is expected to be released in FY20 and, in keeping with Frontier’s ambition to “create a multi-franchise success story“, two additional titles are also in “earlier stages of development.”  This, coupled with its growing relationship with Chinese entertainment giant Tencent following the latter’s strategic investment in 2017, should ultimately help the stock recapture its former spark.

Assuming all goes to plan, a forward P/E of ‘just’ 24 for 2019/20 could make the shares something of a bargain today.

Reassuringly expensive

Thanks to its lack of dependence on the success of just a few titles, however, my preference in this industry remains diversified gaming services provider Keywords Studios (LSE: KWS) — a stock I’ve owned for two years now. Over this time period, the company has more than quadrupled in value as the market has seriously warmed to its growth strategy.

Normally a seemingly never-ending acquisition spree would put fear into the hearts of investors. Taking into account the fragmented industry in which it operates, however, it continues to make a lot of sense for a business like Keywords. 

The latest addition to its estate is Gobo (composed of Studio Gobo and Electric Square). Purchased for a total consideration of up to £26m, it provides services to video game publishers and developers around the globe. Revenue grew from £6.2m in FY17 to £11.6m in the 12 months to the end of July.

According to Keywords, this acquisition — expected to be earnings-enhancing in the first year — “adds considerable expertise and scale” to its game development business. 

A current valuation of 45 times expected earnings will still be too high for many investors. But this isn’t to say that Keyword’s stock is necessarily overpriced. Indeed, some companies continue to motor ahead despite having a perpetually high price tag. In my mind, Keywords will continue to occupy this group. 

The post Down over 40% since June, is this former market darling now a bargain? 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 Keywords Studios. The Motley Fool UK has recommended Keywords Studios. 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.