The AIM 100 video game developer Team17 (LSE: TM17) has seen a share price increase of over three times in the last two years. But I think the best is yet to come for this UK share.
Here is why.
Strong financials
Its results for the full-year 2020 released yesterday are impressive. The company saw a 34% growth in revenues. Its earnings per share also grew by 32%. These numbers have been helped along by the lockdowns, which limited our entertainment options.
Growing industry
According to a MarketWatch report, sales of video games rose by 20% last year. But the gaming industry was a growing one even before that. And this shows up in Team17’s numbers too. The company has seen a steady rise in sales and its bottom line has shown consistent increases too.
Moreover, it is expected that the industry will continue to grow in the foreseeable future as well.
In 2021, it can continue to be fuelled by the pandemic as well. By the time that the majority of us are vaccinated and free movement once again becomes the norm rather than the exception, most of the year will have passed. This would mean another strong year for home entertainment.
Further, it is possible that gaming has found new converts as well in these unexpected times, which can bode well for its demand going forward.
According to Team17’s release, the industry is expected to see an average growth rate of 7.6% up to 2023. This may be less than half the growth seen in 2020, but I think considering the size of the video games’ industry provides some context. It is estimated to be worth $180bn in 2020, which compares to $100bn for the global film industry. This in itself indicates the kind of growth opportunity that exists.
Bullish outlook
Team17’s 2021 outlook is bullish too. It has referred to both its diverse pipeline of launches and M&A opportunities for further growth. This indicates that the UK share can continue to rise further from here.
What can go wrong for the UK share
However, the best laid plans can go wrong. I think we need to consider the fact that post-lockdown, demand for games may decline faster than expected as the pent-up demand for outdoor entertainment can finally be met.
Further, a economic slow down post-pandemic cannot be ruled out as the real loss to the economy becomes clearer. A slow down is typically bad news for discretionary demand segments, like video games.
Also, UK share’s earning ratio at 44 times makes it a pricey stock. While it can be justified by Team17’s robust performance, especially in a bad year for many companies, as things start looking better for the rest, it becomes less easy to do so.
The takeaway
All in all though, I am in favour of this UK share. The company is in a growing market and has performed well. Its share price increase of 1.4 times in the last year alone makes me hopeful that if I buy I stand a chance to double my money.
