Why I’d still buy these two top growth stocks that have doubled in the past year

After rising over 125% in value in the past year there could still be plenty more to come from these stellar small-caps.

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It’s been another banner 12 months for videogame technical services provider Keyword Studios (LSE: KWS) as the company’s share price has rocketed over 125%. This level of growth is almost par for the course with Keyword due to its successful strategy of consolidating the enormous market for outsourced technical services such as localisation for different countries, audio recording, player support and functionality testing.

To date, these services have largely been provided by small local outfits that focus solely on, say, translating AAA game titles into Polish. What Keyword does is buy up these local firms, bundle their services into its broader package of offerings, win larger contracts from big studios based on offering a broader array of services, improve margins through consolidating back office functions and plough increased cash flow back into new acquisitions.

In just the past three years, the Dublin-based business has increased annual turnover from €58m to €151.4m with pre-tax profits rising a similar amount from €8m to €23m. Last year alone, revenue jumped 59% thanks to 11 acquisitions, as well as phenomenal organic sales growth of 15.1%.

Keyword, which is admittedly not a completely objective party, estimates the potential addressable size of its market stands at $2.5bn. Even if this estimate proves to be ridiculously optimistic and the market is just half that size, it still leaves years of potential growth.

Given the increasing levels of outsourcing performed by big budget game developers and Keywords’ proven roll-up strategy, it’s unsurprising that the market values the company’s stock quite highly at 42 times forward earnings. However, I still think this is a price worth paying for a well-run business with a proven growth strategy and plenty of room to expand.

Kicking it up a notch 

It’s been an even more rewarding year for investors in game studio Frontier Developments (LSE: FDEV) who have seen the value of their shares rise 145% since last July. This growth has been driven by a step-change in investors’ attitudes towards the studio, thanks to its current games selling well, management developing an exciting pipeline of new games, and the company’s shift towards a self-published business model.

In the half year to November, the group’s revenue grew slightly from £18.1m to £19m, but any growth at all was impressive as the period contained no new releases so sales increases were driven by new paid, downloadable content and continued sales of older games.

But growth looks set to move up a notch over the next year due to last month’s release of Frontier’s third game, which is based on the wildly popular Jurassic Park movies. Customers have embraced the new game with open arms and management now expects full-year revenue for the period ended May 2019 to be at the top end of analysts’ expected £58m-£88m sales range – quite a step up from the £37.4m in revenue posted in financial year 2017.

Given that Frontier has now found great success with each of its three titles, there’s plenty to like as the founder-led studio beefs up its development team and pushes on with its plan to more rapidly develop games based on already successful franchises like Jurassic Park. The company’s stock is pricey at 32 times forecast 2019 earnings but I still reckon there’s plenty left in the tank from this one.

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.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Keywords Studios. 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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