- Cost of living crisis impacting sales
- Significantly lower profits expected
Shares in Frontier Developments (FDEV) plunged by 40 per cent after the videogame developer said it expects to miss market consensus for full-year sales and operating profit.
Due to worse-than-expected sales of its F1 Manager 2022 game, an underwhelming portfolio performance over the Christmas period, and an “uncertain contribution” from game label Foundry, management cut its sales forecast to “not less” than £100mn for the year to 31 May.
This level of revenue would give annual operating profit of around £2mn, thinks the board, though it also highlighted that it was still possible that the company could beat last year’s £114mn top-line posting.
Analyst consensus for the 2023 financial year was for sales of £135mn and operating profit of £19mn. The share price plummet after the company’s profit warning was not, in this context, a surprise. Chief executive Jonny Watts said that it was "very disappointing to be resetting our financial expectations".
The poorly-received update highlights the challenges that the videogame sector faces from the cost of living crisis as consumers trim spending on discretionary items. AJ Bell investment director Russ Mould noted that “computer games are not cheap and anyone looking to save money to help pay the bills might see them as something that can wait until another day”.
This trend was also evident in a full-year update on Monday from indie videogame publisher Devolver Digital (DEVO). The company said that December sales were weaker than forecast and pointed to the risk to sales volumes in 2023 from the “negative global economic outlook and reduction in consumer spending”. The shares were down by 9 per cent.
We moved our recommendation on Frontier Developments down to a hold in November. The company is a riskier bet than some of its peers with stronger recent track records, which the profit warning has emphasised. But analysts expect a big share price uplift – the mean target price is 1,619p according to FactSet. Interim results are due on 19 January. Hold at 602p.
