What just happened to the Frontier Developments share price?

The Frontier Developments share price crashed yesterday after a trading update. But is this a buying opportunity? Zaven Boyrazian explores.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The Frontier Developments (LSE:FDEV) share price took quite a tumble yesterday. The game development studio and its shareholders watched in horror as more than 30% of its market capitalisation was wiped out. And as a consequence, its 12-month return is a disappointing -30%. Despite having a stellar run in 2020, the stock has since had a pretty rough ride. So, what’s going on? And is this actually an opportunity for me to add more shares to my portfolio?

Frontier Developments share price vs performance

I’ve previously explored this business. But as a quick reminder, Frontier is a developer of video games with several leading titles under its brand. These include the massively popular Elite Dangerous, Planet Coaster, Planet Zoo, and Jurassic World Evolution.

Yesterday management provided a trading update about recent performance. And despite what the Frontier Developments share price would indicate, certain aspects of the business are going well. On 9 November, Jurassic World Evolution 2 was released on PC, Xbox, and Playstation consoles. And it was met with praise, achieving a Metacritic score of 79% and a GamesRadar score of 4/5. This is definitely a relief compared to the initial launch of Elite Dangerous: Odyssey earlier this year which was criticised for lack of polish.

Following this launch, the company believes this sequel will outperform in sales versus the first game in the series. What’s more, gamer interest is expected to continue rising next year following the release of the Jurassic World Dominion film in June. Combining this with the upcoming Christmas holidays, things are looking up for this business. At least, that’s what I think.

So why did the Frontier Developments share price crash on this news?

Taking a step back

Pre-orders on all gaming platforms for this latest title were in line with expectations. However, after release, the demand from PC gamers hasn’t been as high as initially anticipated. Management has placed the blame on a crowded gaming space due to other large titles being released on PC at the same time. While that certainly sounds plausible, this problem late in the year has led to sales guidance taking a hit.

Analysts were expecting total revenue for its May to May 2022 fiscal year to land at £140m. However, after this latest trading update, management adjusted its guidance to anywhere between £100m-£130m. Apart from being lower, the wide range does raise some red flags about the group’s confidence as to whether sales will pick up in the short term.

This uncertainty has understandably spooked investors. So, seeing the Frontier Developments share price take a hit is hardly surprising.

A buying opportunity?

As frustrating as seeing guidance being cut is, I can’t help but feel investors have overreacted to this news. Suppose management is correct in its explanation behind the lower PC sales? In that case, this is ultimately a short-term problem, especially given the group’s Launch & Nurture development strategy that delivers game sales long after the initial release date.

With an impressive line-up of future titles, including Formula One and Warhammer: Age of Sigmar, I still believe the future is bright for this studio. That’s why I see yesterday’s sell-off in the Frontier Developments share price as an opportunity to increase my stake in the business.

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.

Zaven Boyrazian owns shares of Frontier Developments. The Motley Fool UK has recommended Frontier Developments. 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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