Can these white hot growth stocks still make you a fortune?

Investors are flocking to gaming companies. Paul Summers takes a closer look at two of them.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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If you want an indication of just how hot the video games industry is becoming from an investment point of view, take a look at the number of developers and publishers coming to market. In only the last six months or so, Codemasters Group, Team17 and Sumo (LSE: SUMO) have all begun their AIM journeys. 

With this in mind, today’s pre-AGM statement from the last of these new-stocks-on-the-block made for interesting reading. 

“Full of optimism”

News that it had been trading in line with market expectations in the few months it’s been available to investors will no doubt have pleased those already holding the stock (although no firm numbers were provided). It was management’s bullish outlook for the company that will likely get them salivating.

Having referenced the Association for UK Interactive Entertainment’s prediction that the global software market is set to grow by 30% to £180bn in the next three years, Sumo remarked that it is “full of optimism for the future” and “well placed to take advantage of the considerable opportunities” it can see ahead.   

This positivity was backed up with news on favourable reactions to the company’s games at the huge E3 Conference in Los Angeles. Crackdown 3 — the trailer for which was displayed by Microsoft during a press briefing — was “well received” and will launch early next year. Another forthcoming title — Team Sonic Racing — garnered a number of award nominations. Elsewhere, Sumo’s visual design company, Atomhawk, continues to export its services to an enviable list of clients across the globe“.  

Given the above, it’s no surprise that Sumo’s shares were up over 5% this afternoon. Taking this rise into account, the company’s valuation has now climbed over 50% since it came to market last December.

With the company looking to speed its growth through acquisitions, I think there could be more upside ahead. A valuation of 33 times forecast earnings before this morning’s update looks frothy, but less so when a PEG ratio of just 1.06 is considered. 

Monster gains 

To give some idea of how popular Sumo’s stock could become, it’s worth taking a look at industry peer Frontier Developments (LSE: FDEV).

In less than two years, its shares have jumped from 180p to trade at highs of over 1800p, with a significant proportion of these gains coming since last June’s announcement that Chinese online giant Tencent — with hundreds of millions of users — had agreed to make a strategic investment in the company. Anticipation over the Cambridge-based firm’s now-launched Jurassic World Evolution franchise has no doubt also contributed to this rise.

Elsewhere, and as part of an update on trading for the full year to the end of May, Frontier stated that its Elite Dangerous and Planet Coaster franchises were continuing to perform, so much so that the company now expects the numbers to be ahead of those expected by analysts. Estimates of roughly £34m in revenue and £2m in operating profit of £2m were offered.

With updates on new games likely in the near future, an increasingly-diversified portfolio of titles and the potential for further growth via acquisitions, Frontier’s popularity appears justified. That said, the 15% slide in the shares since the update suggests that a lot of good news was already firmly priced in.

Could now be a great entry point? Only you can decide.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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