Keywords Studios' weakness offers buying opportunity

Keywords Studios’ (KWS) share price is being weighed down by concerns that artificial intelligence (AI) will threaten its business.

The company provides outsourcing services to video games developers and film studios; it helps with everything from translation services, to graphics and marketing. The strength is its large workforce and geographic scope, but since the launch of ChatGPT at the end of 2022 the share price has fallen 50 per cent.

AI is a distant threat for now. The more immediate problem has been the Hollywood writers' strikes. In the year to December, organic revenue grew 5.6 per cent, but if it wasn’t for the strikes it would have been nearer 9 per cent.

The concern is that even without the strikes it is a significant slowdown from the 21.8 per cent organic growth last year. However, this must be placed into the context of the wider video games industry, which contracted last year in a post-Covid slump. The fact remains that Keywords has been taking market share.

The adjusted cash profit (Ebitda) margin dropped 1 percentage point to 20.3 per cent, which is impressive given the weakness in the market. This was put down to cost management and improved focus on efficiency.

Keywords has kept its full-year guidance unchanged and is expecting organic revenue growth to accelerate in the second half of the year. House broker Numis is forecasting 8 per cent growth in 2024, rising to 10 per cent in 2025.

The other way of looking at Keywords is that its connections throughout the industry create a moat around the business and that AI will allow it to further improve efficiencies. A year ago, its forward price/earnings ratio was 27, and now it is just 13. It’s looking cheap, notwithstanding the potential threat from AI. Buy.

Last IC View: Buy, 1,397p, 12 Sep 2023