Earlier this week Richard Branson’s venture into the space race from the UK crashed spectacularly into the sea off Ireland, as his Virgin Orbit NASDAQ:VORB launcher experienced ‘an anomaly’ and its payload of commercial satellites – the UK’s first-ever space mission – burned up in the atmosphere.
It seems that Cambridge-based video game developer, Frontier Developments AIM:FDEV, made famous through its 1985 Elite space trading game, also experienced a ‘failure to launch’ with its Formula One IP, leading broker Berenberg to downgrade the stock to ‘Hold’ from ‘Buy’ and slash its target price from 2,000p to 620p.
The company, after receiving a thumbs-up recommendation from another broker, Shore Capital, which upgraded FDEV from a ‘Hold’ to ‘Buy’ rating at the beginning of the year with a fair value rating of 1,350p, released a disappointing set of results at the beginning of the week (9th January).
Sales underperformance
In the results announcement, Frontier reported revenue for 1HFY23 of approximately GBP57m compared to 1HFY22 of GBP49.1m. Although this was a 16% year-on-year improvement, Jonny Watts, the company’s chief executive said: “Based on the lower than expected sales contribution from F1® Manager 2022, the general sales underperformance across the whole portfolio during the holiday period, and the uncertain contribution from Foundry [the company’s third-party publishing arm] in the remainder of FY23, the board no longer expects to achieve the FY23 market consensus forecasts for revenue and IFRS operating profit, being GBP135m and GBP19m respectively.”
As previously reported, the company was expecting growth of at least 20%, but has been affected by the cost-of-living squeeze and poor Christmas sales performance and subsequently lowered its FY sales guidance to “not less than GBP100.0m,” down from GBP135m and a 2% reported underlying earnings margin.However, Watts said in the statement that it was “still possible to surpass last year’s record revenue performance of GBP114m, particularly if one of the upcoming Foundry titles is a conspicuous success.”
Frontier opened trading today (11th January) at 499.5p and had fallen to 480p as the morning’s trading session came to a close. Frontier has offered a -50% year-to-date return, a -72.5% one-year return with its shares have ranging between 470p and 1,832p over a 52-week period. The company has a market capitalisation on GBP199.5m.
According to Berenberg, Frontier trades on 24x enterprise value/earnings before interest and tax and 29x price-to-earnings for year ending May 2024, falling to 16x and 18x in full-year 2025.
Shore Capital, the broker, said in a research note this week: “We are disappointed by this […] update and plan to revise our forecasts shortly, however, we believe FDEV has some good quality characteristics, noting the historical success of its launch and nurture strategy, strong balance sheet (GBP43m cash as of 30th November 2022) and its growing portfolio of titles, and we believe that due to these, the group could return to its previous strength when the macro-storm calms.”
Shore Capital was retaining its ‘Buy’ rating at a price of 999p.
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Unfortunately, Frontier seems to be a victim of consumer’s balance between ‘needs’ and ‘wants’ and in the current climate a new video game is not a ‘need’ and as people try to balance their expenses and pay the bills, a computer game is not highest of their priorities.
However, the gaming community is as an entity quite loyal to its hobby – as the recent performance of Games Workshop LON:GAW showed, hobbyists will continue to support their games, but even Games Workshop is wary about the oncoming recession.
Frontier Developments has strong IP and has consistently shown it is innovative and creative, so like Shore Capital, we believe that the games developer will see out the storm and return to its previous performance after buyers return to the market.
