Buckle into Codemasters

One of the industry beneficiaries could ultimately prove to be London-listed video games developer Codemasters (CDM), but for now its shares are down 34 per cent on their February high. We think this presents a buying opportunity.

The company is a leader in car-racing games; not least its Formula 1 series, which in 2019 won 'Best Racing Game' at the TIGA Awards for the third consecutive year. It recently secured the F1 licence for up to a further seven years. It also has an exclusive game licence for the Fast & Furious film series thanks to its acquisition of Slightly Mad Studios (SMS) late last year. This deal was accompanied by a £20m placing at 210p to help fund an initial payout of $30m, with a further maximum deferred payments of $166m over three years.

The dominant niche position and intellectual property (IP) rights underpin efforts to make Codemasters steadily become more profitable. The developer has embraced a games-as-a-service (GaaS) business model, which means that its products can be digitally downloaded or streamed, cutting distribution costs. Gross margins rose to 89 per cent in the first half of 2020, from 88.5 per cent, as digital sales grew from 53 per cent to 62 per cent of the total. 

While there is plenty to be positive about, the coronavirus is causing disruption. Cancellations of F1 races could hurt consumer awareness of its game. More significantly, a new Fast & Furious film, which a new game was to launch alongside, has been delayed by 11 months until spring next year. The game is not based on the film’s plot, so could be launched independently. It is a joint project and discussions about a new release date are ongoing. As long as it is released by the first quarter of next year, Codemasters does not expect a material impact on its 2021 financial year. 

A less easy to quantify issue associated with the coronavirus is the question of how effectively staff will be able to meet the industry’s notoriously tough launch deadlines when working from home.