Frontier Developments disappoints again

Frontier Developments (FDEV) has lowered its full-year profit and revenue expectations after a poor trading period over Christmas. The games developer had pinned a lot of hope on its new F1 Management game, however sales performance “fell materially below original expectations”.

Management believes this poor performance was due to worsening economic conditions. When energy prices are rising consumers are more likely to cut back on luxury items such as video games. However, it is not just a demand issue. Delays to game production during the pandemic mean there is a big backlog of games to be released. Competition is tough.

The board lowered full-year revenue expectations to between £100mn and £114mn; correspondingly operating profit is expected to be between £2mn and £10mn. At best, growth has stalled and, at worst, it will be moving backwards.

The concern for Frontier is that this half's underperformance is not a one-off. Last year, its Elite Dangerous: Odyssey game flopped after being beset by glitches. This was followed by lower-than-expected performance of its Jurassic World 2 game. Management said Jurassic World Evolution 2 would outperform its predecessor, but currently it's at 96 per cent of its sales more than a year after release.

As well as the underperforming games Frontier has developed, the publishing side of the business is also under threat. Frontier Foundry publishes games for third-parties, but management is currently “assessing” its strategy due to a lack of return on investment.

The poor recent track record is concerning. With the share price falling dramatically in the past year, Peel Hunt currently has it trading on a 2024 free cash flow yield of 19 per cent. Game stocks can turn around rapidly, but until Frontier reverses its recent disappointing performance we won’t be convinced. Hold

Last IC View: Hold, 602p, 9 Jan 2023