London listed video game stocks see strong demand as boom continues

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Investors in AIM-quoted Frontier Developments (AIM:FDEV) Plc should be buoyed by financial results this week from Electronic Arts, in particular the strength in the top-tier game publisher’s live services revenue.

EA announced booking of US$1.34bn which was 6% above guidance and expectations. The top performing part of the business was live services which comprise sales and revenues from its ‘ongoing’ titles.

The video game industry is increasingly pushing for longer term engagement, monetised though subscriptions and in-game transactions. EA is stronger than most in this area, though Tencent-owned EPIC Games is perhaps that stand-out in the sector which is led by its Fortnite franchise.

EPIC’s Fortnite, EA’s Apex Legends, and Activision’s Call of Duty Warzone are all free to play games, which make their money though the sale of add-ons and downloadable extra content.

In EA’s first-quarter results, the game publisher revealed than 8% of its total sales are now generated from live services up from 75% a year ago.

Liberum, in a note, said that EA’s approach can deliver a steadier stream of revenues versus the ‘lumpy’ traditional one-off sales model.

Analyst Olivia Honychurch, moreover, highlighted that Frontier Development benefits from a similar approach.

“Whilst it hasn’t gone down the free to play route, Frontier Developments have also taken this approach to its games with ongoing expansion packs and in-game purchases for its franchises that are designed to drive longer-term engagement; and which have similarly helped the business to deliver stronger, more persistent revenue trends in recent years,” Honychurch said.

The analyst also pointed to temporary sector-wide share price weaknesses triggered by concerns of Chinese regulation of technology companies (including notable gaming investor Tencent) as a potential buying opportunity.

“With global gaming share prices having suffered over the last few days from some negative comments around potential Chinese regulation, we see that short-term weakness as an attractive entry point to make the most of the long-term upside we anticipate for the sector,” Honychurch added.

Frontier is not the only London-listed stock finding strength amidst the gaming boom that’s emerged through the pandemic and the past year’s next-generation console roll-out.

Sumo Group PLC (AIM:SUMO) in July became the subject of a GBP919mln takeover offer from Tencent.

London’s larger gaming services firm Keywords Studios PLC (AIM:KWS, FRA:KS3, OTC:KYYWF) this week reported 23% organic revenue growth for the first half of 2021 and described robust demand for the group’s expertise.

Keywords expects to report first-half revenues of around EUR238mln, up roughly 37% on the EUR173.5mln in the same period of 2020.

Honychurch in a separate note said she sees persisting strong demand for Keywords.

“The group has ‘continued the momentum seen in the second half of 2020, with the buoyant video games market focussed on developing new content to keep gamers engaged following increases in both numbers of gamers and gameplay during the pandemic’.

“Specifically, we believe this sustained strength is being driven by various industry trends playing out at present, such as the roll-out of new generation consoles which continues to accelerate.”

The analyst added: “Overall we would expect Keywords to see a large body of work from these trends, and indeed management have commented that new console content has already proved to be an important driver of growth this year.

“In addition, increasing development of content for up and coming streaming platforms should also drive demand for Keywords’ services over the short to medium term – either through re-working back catalogues or launching exclusive titles.”

Liberum has a ‘buy’ recommendation with a 3,300p price target, suggesting some 16% upside to the current price of 2,784p.


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