Frontier's strong pipeline of games should boost revenue

Stuck at home during the pandemic, many people escaped the boredom of their reality by immersing themselves in computer games. Gaming has grown consistently in popularity over the last few decades but has never been so vital to people as in the last year. 

Frontier Developments (FDEV), a leading UK computer game company, posted strong end of year results thanks, in part, to a pandemic uplift for the gaming industry. According to trade body UK Interactive Entertainment, the UK gaming market grew by 29.9 per cent in 2020 to a record £7bn. In the year to 31 May, Frontier’s revenue was up 19 per cent to £90.7m and its operating profit was up 20 per cent to £19.9m, which gives it an operating margin of 22 per cent.

Frontier’s cash balance dropped from £45.8m to £42.4m, even after £14m of investment in upcoming releases. The company is planning to release Jurassic World Evolution 2 in November 2021, a sequel to its biggest selling game to date. It also has a Formula 1 management game coming out during the Formula 1 2022 season and "at least" three other games planned for release in 2022 through development partnerships.

Based on this release schedule the board is projecting revenues of £130m to £150m for the full-year 2022 and for 2023 it is projecting £160m to £180m. 

There were some issues with the release of its Odyssey game earlier this year, although Investec believes these were just “growing pains” and the broker kept its guidance unchanged. It is forecasting Frontier’s profit before tax to rise to £31m for 2022 and up to £38.4m for 2023. 

On top of the growth in the sector, global gaming infrastructure could be in for some major changes in the near future. Wolfire Games filed a lawsuit alleging that Valve uses its PC and Mac gaming platform Steam’s dominance of the marketplace to extract “an extraordinarily high cut” of sales.

Steam currently takes a 30 per cent cut on most games its sells and Frontier sells around 60 per cent of its games through the platform. Even if Valve is found not to be anti-competitive, the lawsuit adds to the increasing pressure on marketplaces to lower fees. Epic Games, which owns Fortnite, has also filed a similar claim against Apple.

The Chinese government also rocked the video game world late last month by announcing it would limit playing time for under-18s to just three hours a week. State-run media outlets had been on the attack for some weeks:  The Economic Information Daily referred to gaming as “spiritual opium” in early August. Technology giant Tencent (HK:0700), which owns 9 per cent of Frontier, fell over 10 per cent at the time of the 'opium' comment, and promised its own controls on youth gaming weeks before Xi Jinping's government stepped in. 

Frontier looks well placed for growth regardless of the China situation, as the country only provide 5 per cent of sales, while the lawsuit could see the company's take from Steam go up. Buy.

Last IC View: Buy, 3,253p, 3 February 2021