The video games industry grew by around 10% year-on-year in 2020 as Covid-19 lockdowns boosted gaming demand. But it’d be a mistake to write this off as a temporary surge and expect sales to drop off.
In fact, the industry has been growing at a terrific pace over the past decade, underpinned by rampant growth in mobile gaming. And forecasts suggest the market should keep expanding strongly (Statista analysts predict compound annual growth of 9.3% between now and 2025).
I bought games development services provider Keywords Studios to make money from this rise. And I’m thinking of snapping up software developer Team17 Group (LSE: TM17) too. This has been one of the best growth stocks to buy in the past few years. And City analysts think the bottom line here will keep expanding robustly. Annual earnings rises of 4% and 10% are forecast for 2021 and 2022 respectively.
Team17 makes games for all of the major consoles as well as PCs and the fast-growing mobile gaming market. It has a packed IP portfolio which includes income-driving franchises such as Worms, The Escapists and Overcooked! These franchises are highly conducive to money-spinning sequels, spin-offs and similar universal extensions. Encouragingly, Team17’s product pipeline is packed with a broad array of gamer favourites right now.
There’s another reason why getting a slice of the video games market is a good idea because the market’s ripe for consolidation. Acquisition action in the industry is heating up and, in recent days, Electronic Arts snapped up Golf Clash-maker Playdemic for a cool $1.4bn. This follows the American giant’s takeover of former London Stock Exchange share and racing game specialist Codemasters back in February.
Another UK growth stock, Sumo Group, is also in the process of being acquired by China’s Tencent. The agreed fee stands north of £900m and represents a 43% premium to the UK developer’s share price before the deal was announced. Could Team17 be the next Indie developer on the chopping block?
Another growth stock I’d buy
So Team17 owns a raft of popular products in an industry that’s growing exceptionally fast. But this, of course, doesn’t mean it’s guaranteed to deliver blockbuster shareholder returns. As CD Projekt showed with its disastrous launch of Cyberpunk 2077 last year, a new game launch can have plenty of promise but development problems can leave a massive hole in the profits column.
What’s more, at current prices, Team17 trades on a high forward price-to-earnings (P/E) ratio of almost 40 times. A high multiple like this could — just like at CD Project last year — cause a severe share price drop if development or trading problems do indeed occur.
That said, high earnings multiples are common among tech growth stocks like this. I certainly paid a pretty premium for my Keywords Studios shares. And I was happy to, given its terrific long-term profits outlook.
All things considered, I think Team17 could also be one of the best growth stocks to buy today.
Royston Wild owns shares of Keywords Studios. The Motley Fool UK has recommended Electronic Arts and 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.