Should I buy Frontier Developments stock?

The Frontier Developments plc (LON::FDEV) share price plummeted on positive full-year results. Why?

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Videogame specialist Frontier Developments (LSE:FDEV) today released its full-year results to 31 May and they were very good. However, the share price fell as much as 8% on the news. Why would this be? I expect it’s because of lacklustre analyst revenue forecasts for the year ahead (£65m-£70m up to May 2020). In addition, investment management partnership Lansdowne Partners halved its 10% stake in Frontier a few days ago, which may have had a ripple effect.

However, I imagine this reaction could be temporary. After all, revenue for the business grew by 160% to £89.7m and operating profit was up almost 600% to £19.4m, whilst earnings per share were up to 45.4p from 9.6p a year earlier.

Self-publishing revenue accounted for 99.8% of sales in the year, up 4.9%. Physical sales represented around 15% of total company revenue, up from 7% in 2018. This rise was due to sales of Jurassic World Evolution console discs on PS4 and Xbox One.

Elite Dangerous

Frontier produces and develops popular videogames with a cult following, its most successful being Elite Dangerous, a space-flight simulation game. The company prides itself on active community engagement, and offers free updates as well as creating chargeable content.

As mentioned, contributing to its success in the latest year was Jurassic World Evolution and Frontier’s own self-published offerings such as the aforementioned Elite Dangerous and Planet Coaster. Licensed game Jurassic World Evolution actually proved to be the firm’s biggest launch to date. The game achieved one million sales in five weeks and two million in seven months.

Planet Zoo

Fans are eagerly awaiting the touted release of Planet Zoo, a simulation game where the company says players can “construct detailed habitats, manage your zoo, and meet authentic living animals who think, feel and explore the world you create around them.” In these eco-obsessed times, I imagine this game is going to be very popular. It’s aimed at a broader age and taste range than previous game Planet Coaster, which also did well, but had a narrower target niche.

And its games have plenty of future growth potential. It is company policy to release new games on PC first to maximise long-term engagement but keep the opportunity to expand to consoles at a later date. Releasing onto consoles would widen the audience and boost potential profits, although this comes with hardware limitations and development costs that have to be ironed out first. 

Frontier is the UK’s largest independent studio and the company’s steady growth is reflected in the fact that it recruited 120 staff in 2019, bringing the headcount in its Cambridge headquarters to 460.

Going by the annual report, it looks as if the company does not plan a franchise release in 2020 and still has no plans to introduce a dividend. This may disappoint some shareholders, but others feel it is important that the company uses its cash for acquisitions and to continue growth.

Overall, I like the business model. It franchises and produces quality videogames and has a big fan base. Its management team seems well organised and driven, and its ongoing recruitment drive makes me think management expects more growth. The ascent ahead may be slow and there is always the risk of a release not achieving the desired success, but going by its track record, I feel hopeful that the share price will climb. I consider this a Buy.

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.

Kirsteen 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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