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.

In this article, I’m going to provide a brief overview of the video gaming stocks listed on the London Stock Exchange. I’ll also discuss my top pick in the UK video gaming sector right now.

Team17

Team17 (market cap: £906m) is a leading UK independent video game developer. Its games – which are available on multiple gaming platforms – include Worms Rumble, Overcooked: All You Can Eat, Monster Sanctuary, and The Survivalists.

Team 17 has generated strong growth in recent years. Between FY2015 and FY2020, revenue jumped from £10.4m to £83m. However, this growth is reflected in the stock’s valuation. Currently, TM17 trades on a forward-looking price-to-earnings ratio of about 37.

Frontier Developments

Frontier Developments (market cap: £932m) is a UK gaming company that develops games across multiple platforms using its proprietary cross-platform technology, Cobra. Elite Dangerous and Planet Coaster are some of its popular games.

Between FY2015 and FY2020, Frontier’s revenue rose from £22.8m to £76.1m. Like Team 17, however, its growth is reflected in its valuation. Currently, the stock has a high forward-looking P/E ratio of 54.

Sumo Group

Sumo Group (market cap: £622m) is a gaming company that, through its Sumo Digital, Atomhawk, and Pipeworks Studios businesses, delivers end-to-end visual and development solutions to the video games industry. Its services range from visual concept design and pre-production through to development, user-interface design, and post-release support. It’s a co-development partner to some of the world’s largest top gaming publishers including Sony and Microsoft.

Between 2015 and 2020, Sumo’s top line rose from £21.6m to £68.9m. Currently, it trades on a forward-looking P/E ratio of about 41.

Keywords Studios

Keywords Studios (market cap: £1.85bn) is a leading provider of technical and creative services to the video gaming industry. Its services include localisation (translation), game development, art services, and game testing. It serves nearly all of the major players in gaming including Electronic Arts, Activision Blizzard, and Microsoft.

Keywords has grown rapidly over the five years through a combination of organic growth and acquisitions. Between 2015 and 2020, its revenue climbed from €58m to €373.5m. The stock currently trades on a forward-looking P/E ratio of about 40.

My top UK video game stock

In terms of my top pick from these UK video game stocks, it’s Keywords Studios. That’s the stock I own in my share portfolio.

The reason I like KWS is that it’s essentially a ‘picks-and-shovels’ play on the gaming industry. No matter which games are successful, Keywords should do well over time as the gaming industry grows.

Sumo, Frontier, and Team17 are all great companies. However, I see them as higher risk than KWS because they are focused more on game publishing.

KWS isn’t without risk, of course. It has a high valuation meaning that if growth stalls, its share price could take a hit. It’s worth noting that, in the past, its share price has been quite volatile.

However, I’m comfortable with the overall risk/reward profile. I see this UK video game stock as a long-term holding for my portfolio.

The post UK video game stocks: 4 shares to consider in 2021 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. Edward Sheldon owns shares of Keywords Studios, London Stock Exchange Group, and Microsoft. The Motley Fool UK owns shares of and has recommended Activision Blizzard and Microsoft. The Motley Fool UK has recommended Electronic Arts, Frontier Developments, 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.

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.

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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.

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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.

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.

In terms of stocks, this means turning a potential crisis into a buying opportunity, especially for top growth shares.

Growth stocks are often expensive

Under normal circumstances, one of the problems with buying shares with good prospects is they usually sell at correspondingly high prices. You may be right about their futures, but you can easily overpay for the expected gains.

In other words, the investment case for the company itself is sound, but the price is too high. This makes the purchase risky.

The ideal scenario is to purchase these same stocks when they’re selling at a much lower price-to-earnings (P/E) ratio, such as during a stock market crash. If and when the next crash happens, I’m hoping the following two shares will provide me with buying opportunities.

Codemasters Group Holdings

Codemasters (LSE: CDM) is a racing video game developer and publisher and is the company behind Formula 1. The video gaming industry has been one of the areas to thrive during the pandemic period. With many people stuck at home, gaming is in demand, and opportunities for gaming companies abound. Any lockdown resulting from a second wave of infections may produce the same.

But Codemasters is more than just a reactive investment opportunity. Over the last five years, its revenues have increased by 145%, its operating profit by 436%, and earnings per share (EPS) have soared from a negative 6.1p in 2016 to 8.9p in 2020. It’s certainly a profitable revenue generator, unusual for a technology company.

In addition to these qualities, Codemasters records a current liquidity ratio of 1.89, indicating the firm can easily meet its short-term financial obligations. A debt-to-equity ratio of 0.54 also shows the company is potentially solvent in the longer term too.

However, the market has all these qualities priced-in. Codemasters currently trades on a P/E of 41.6, far too high for my liking. But if a second stock market crash were to happen, I’d be eagerly waiting for this to drop under the industry P/E average of 27.  

Team17 Group

Team17 (LSE: TM17) is another video gaming growth stock, known for its classic Worms game. Like its AIM-listed peer above, it has also benefited from recent market opportunities. However, it has recorded an even more impressive set of financials over the last five years.

Revenues have increased by 495%, operating profit is up 388% and EPS have risen from 2.4p in 2015 to 12.9p in 2019. Team17 boasts a current liquidity ratio of 4.52, meaning it has plenty of resources to finance its short-term commitments. It also has limited debt. 

However, currently trading on a P/E of 42.5, the market already knows Team17 is a good investment case. A purchase now would be highly speculative, given its price. As with Codemasters, I’d prefer to wait for a P/E under 27.

Both these video gaming companies are great performers. However, I think they’re both currently expensive, and therefore risky purchases. A second stock market crash could change that and provide two great buying opportunities. 

The post My top 2 growth stocks to buy in a second stock market crash appeared first on The Twelfth Magpie.

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Rachael FitzGerald-Finch 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.

Today, I’m going to cover three purchases I’ve recently made and why. In spite of the likely economic gloom ahead of us, I think all could prove great additions, over time.

ISA having some of that!

The first stock has been on my watchlist forever. Irn-Bru owner AG Barr (LSE: BAG). To be sure, Barr won’t escape the economic impact of the coronavirus lockdown. With pubs, bars and cafes closed, it’s been dependent on supermarket sales to keep going. 

This, however, should prove a short-term blip. The company is sound and has a great portfolio of brands, including Funkin cocktail mixers and Rubicon to support sales of its legendary orange beverage. Returns on capital employed are reassuringly decent and the firm’s balance sheet also looks solid. 

Barr’s stock rarely goes on sale. Having more than halved in value over the last year, however, it’s changing hands for less than its average valuation over the last five years (18 vs 21 times forecast earnings).

No investment is without risk, and current predictions could still prove optimistic. Nevertheless, I suspect the margin of safety is such that now is the time to at least start adding it to my ISA. 

Down but not out

While AG Barr is a new holding, I’ve also been adding to my existing stake in high street baker and FTSE 250 member Greggs (LSE: GRG).

Some may think this a strange choice, particularly if a second coronavirus wave puts an end to the lifting of lockdown restrictions. There’s also a possibility revenue and profits don’t recover as swiftly as first thought, due to the prolongation of social distancing.

But let’s get real. Greggs surely has a better chance of coming out of the coronavirus storm than most on the high street. A firm selling low-ticket baked treats is unlikely to be impacted as much as those selling discretionary items. A new TV or phone purchase can be postponed. I’m not convinced people will apply the same rationale to a steak bake. Now factor in Greggs’ strong brand, history of savvy marketing, and excellent free cash flow.

This is why I expect to continue holding this company in my ISA for many years to come.  

Gaming for growth

A final ISA purchase I’ve made is actually a fund. Notwithstanding this, I do think it could generate returns to rival the stocks mentioned above. 

The VanEck Vectors Video Gaming and eSports UCITS ETF tracks the performance of 25 companies. All derive a large proportion of their revenue from this hot sector. As I’m sure you know, gaming has been immensely popular over the lockdown period.

Although small, the fund is arguably a safer option than buying a single developer. The latter’s fortunes can be highly dependent on only a few titles at any one time. With this ETF, an investor can mitigate that hit-and-miss risk.

At the end of April, the VanEck fund had returned 27.5% since its inception last June. It is, of course, unlikely to deliver this consistently. Nevertheless, the industry’s strong growth prospects make me sufficiently bullish to add it to my ISA. The fund has a total expense ratio of 0.55%.

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Paul Summers owns shares of AG Barr, Greggs and VanEck Vectors Video Gaming and eSports UCITS ETF. The Motley Fool UK has recommended AG Barr. 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.