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The growth spurt is even more impressive given that physical store sales are effectively on hold
Thursday 28 May 2020 Author: Martin Gamble

While most sectors of the economy have been coming to a standstill during lockdown, the gaming sector has seen a significant boost in business, driven by an increase in the number of people playing video games while stuck at home.

On 20 May Frontier Developments (FDEV:AIM) upgraded earnings guidance for the second time in three weeks, despite its year-end being only a week away. Analysts have struggled to keep pace and will likely need to upgrade their earnings forecasts yet again.

The company is scheduled to update on trading again on 8 June and the shares are up over 20% since the middle of May.

Management have indicated operating profits will be ‘materially ahead’ of the £13m mark, suggesting a number of at least £14.5m, while consensus is currently languishing at £12.9m. This is particularly impressive given that physical stores selling its games have largely been out of operation.

Some analysts think the current tailwind effect from the lockdown will prove temporary and as the world slowly reopens, Frontier will suffer an easing of demand. Shore Capital is in this camp and while it has increased its 2020 profit forecasts by 17% to £14.4m, it is leaving its 2021 estimates unchanged for now.

At the other end of the spectrum are analysts at broker Peel Hunt, who believe the pandemic has merely accelerated existing long-term growth trends for the video gaming industry and momentum will remain post lockdown.

Something that all the analysts seem to agree upon is the increasingly strong roster of game releases that Frontier has assembled over the last year, bring greater visibility to revenues and earnings.

The latest addition to the line-up for a 2023 release is a real-time strategy game based on the hugely popular Warhammer Age of Sigmar, after the company sealed an exclusive intellectual property license with games miniatures manufacturer Games Workshop (GAW).

This deal demonstrates Frontier’s strong reputation for developing multi-platform games and will bring the PC-led real-time strategy game to console players. According to Peel Hunt, this would broaden the audience to the more casual gamer, enabling Games Workshop to potentially reach people it has never reached before.

Andrew Bryant, analyst at Liberum, commented: ‘This takes Frontier into an exciting new genre, extends revenue visibility into full-year 2023 and highlights the increasing value and potential for its development and publishing platform’.

Meanwhile the company confirmed two releases for 2022 including an F1 game and an as yet unnamed game. For 2021 the company will release two major updates including Planet Coaster for consoles and a premium release for Elite Dangerous as well as two third-party releases. 

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