According to Grand View Research, the video games industry is expected to grow by 8% over the next seven years, presenting an enormous opportunity for this tech stock.
A hidden growth opportunity in the gaming sector?
Keywords Studios (LSE:KWS) is a service provider for the video games industry. With multiple studios in its portfolio, the tech stock offers a wide range of services – including art & marketing, game development, audio, quality assurance, and localisation testing.
Today it serves 23 of the top 25 game developers across 60 countries around the world. This includes World of Warcraft developer Activision Blizzard, and Halo creator Microsoft.
Developing a video game today is an expensive process. If a project fails to meet expectations it can have serious financial consequences for studios. In order to minimise risk, most studios only retain a small team of permanent staff. The rest of the talent is provided by companies like Keywords Studios.
Recently, Keywords made two announcements that have re-affirmed my belief that the firm is on the right path.
This tech stock is beating expectations
The first was a quick trading update. Full-year revenue is expected to be in line with company guidance at €367m – a 12.5% increase on last year. Furthermore, the adjusted pre-tax profit is coming in 12% higher than expected at €52m.
Interestingly, the significant increase in pre-tax profit is primarily from improved operating margins as a result of a work-from-home policy. The reduced fixed costs may result in the policy remaining in place in some form even after the pandemic. If so, these margin improvements could remain as well.
Both figures continue to show that despite the disruptions from the Covid-19 pandemic, the firm has continued to thrive. With the next generation of consoles already sold out, it’s clear that the popularity of gaming isn’t declining. This suggests there’s an ever-increasing capacity for growth.
The studio is expanding!
Speaking of growth, the tech stock continued to execute its acquisition-based growth strategy. Keywords just added g-Net Media, an American marketing service provider, to its portfolio for $32m.
Founded in 2001, g-Net has been serving top entertainment companies – such as Netflix and Amazon Prime – as well as leading video game publishers. Both Activision Blizzard and Microsoft are among these, thus furthering the existing relationship these studios have with Keywords.
But, it’s important to remember that acquisitions always carry risk. g-Net, while well known within the industry, is still relatively small, with revenues of $16.3m for 2019. It’s good to see management acknowledge this and included specific terms in the buyout agreement. So far, only $18m has been paid using cash and shares. The remaining $14m is dependent on the studio meeting performance milestones.
The bottom line for this tech stock
The tech stock has yet to make any catastrophic errors in its acquisitions, and seeing performance-based terms in their buyout agreements lowers the risks involved. I believe this prudent approach to business, combined with the delivery of high-quality services, means Keywords Studios is on the path to exceptional growth for many years to come.
