US entertainment industry strikes hit Keywords Studios

Ongoing strike action in the US entertainment industry is proving problematic for gaming outsourcing group Keywords Studios (KWS). The SAG-AFTRA writers’ strike that began in May has since expanded to include actors – and has brought some of the group’s projects to a halt.

The Aim-traded company, which counts major names such as Netflix (US:NFLX), Microsoft (US:MSFT) and Electronic Arts (US:EA) among its collaborators, expects the strikes to impact organic revenue growth by 2-2.5 per cent across the full year. This partly explains why shares in Keywords fell more than 10 per cent on the morning of its interim results announcement. 

There were also a handful of disappointing headline figures included in the half-year update, including a 26 per cent drop in operating profit to €29.3mn (£25.3mn). However, the company said its adjusted operating profit actually increased 5 per cent to nearly €59mn. This figure differs from the group’s reported operating profit in that it’s altered to reflect share-based payment expenses, costs of acquisition and integration and amortisation of intangible assets. 

Keywords’ share price is cumulatively down over 50 per cent in the year to date, as investor enthusiasm for gaming wanes in the post-lockdown world. But Numis analysts see reasons to be hopeful about future growth. “With recent data suggesting a stabilisation in the video game industry and Keywords investing substantial effort to deliver market-leading AI capabilities, we continue to see strong long-term prospects,” they wrote. 

With FactSet broker consensus putting the group’s forward price/earnings multiple at just 11.7 times for the full year, we’d say it’s worth taking a chance given long-term growth predictions for the industry. Buy.

Last IC view: Buy, 2,726p, 16 March 2023