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Owners of quality content should be seen as prized assets in a fast-growing space
Thursday 22 Jul 2021 Author: Martin Gamble

The number of investing options available for UK investors to get exposure to the fast-growing video gaming industry in the UK appear to be shrinking fast after this week’s bid for video games for hire developer Sumo (SUMO:AIM) from Chinese internet giant Tencent.

Of the remaining three direct quoted plays, the name that stands out because of its deep intellectual property and the rich user experience it provides is fantasy games developer and publisher Frontier Developments (FDEV:AIM).

Frontier was founded by industry veteran David Braben who co-authored the seminal game Elite and owns a 32.8% stake in the company.

Even after an 8% gain on the day of the Sumo announcement, Frontier’s shares are still 30% below their January highs, which we believe presents a good opportunity to get onboard.

The fall in the shares looks like it was driven by temporary factors. Firstly, positive sentiment towards the sector has waned since the removal of restrictions, along with other sectors that have benefited from the lockdown.

Secondly, Frontier has had some teething issues with Elite Dangerous Odyssey which was released on PC on 19 May and prompted user criticism. The company believes these issues have been resolved without any long-term reputational damage.


One of the key attractions of Frontier is its strong roster of game releases over the next few years and a fast-growing third-party publishing arm, Frontier Foundry, which is expected to release three new titles in the current fiscal year to 31 May and then five-to-six games per year from 2023.

One release which has creating some excitement is a new game based on the popular Warhammer 40,000 franchise owned by Games Worksop (GAW), due to be released on PC in 2022 on Steam and the Epic Games Store.

Meanwhile, the annual F1 Manager is expected to launch in early fiscal 2023 (after 1 June 2022).

An underappreciated aspect of Frontier’s games, argues investment bank Jefferies, is its focus on regular content updates, user generated creative content and an ever-evolving game play experience.

This means Frontier attracts stickier users which will be a big advantage as the working practices normalise post pandemic. The recent increase in Covid-19 infections also suggests that indoors activities may continue to dominate people’s recreational time longer than some had thought.

Jefferies estimates that Frontier’s strong release schedule and back catalogue will lead to sector leading revenue growth of around 60% in 2023, and yet the investment bank reckons that, looking at earnings growth and the price-to-earnings ration on a two-year view, the shares trade at a valuation discount to peers Team 17 (TEAM:AIM) and Keywords Studios (KWS:AIM).

Consensus forecasts put the shares on a May 2022 PE of 33 times. While not stunningly cheap we believe that recent weakness represents a great opportunity to get exposure to the fast growing gaming industry.

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