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What’s going on with the Keywords Studios share price?

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Image: Activision

The Keywords Studios (LSE: KWS) share price popped almost 7% on Monday when the market opened after the release of a trading update. Let’s take a look to see if I should buy Keywords Studios for my portfolio.

The trading update and growth prospects

As a quick recap, Keywords Studios in a technical services provider to the video games industry. It operates across seven divisions, including Game Development and Localisation. The company has an impressive customer list as it provides services to the likes of Electronic Arts, Microsoft, and Activision Blizzard. This says to me that the company’s services are of a high standard.

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It’s easy to see why the share price rose today. Revenue for the full year is expected to be €505m, a 35% hike year-on-year. Adjusted profit before tax should be in excess of €85m too, a 55% year-on-year rise. What’s also great about this performance is that it will beat current analysts’ consensus forecasts.

The company put this excellent financial performance down to the demand for its services being high due to the buoyant video games market. I see this continuing long into the future due to the expanding gaming sector. There are big catalysts going forward, such as from augmented reality and virtual reality (AR and VR), plus the e-sports sector. Keywords Studios should stand to benefit from these trends.

Keywords Studios also said it has benefitted from a reduction in costs related to Covid, specifically from “remote working, property costs, travel and business development.” I view the reduced property costs as a longstanding saving for the company as remote working is more popular now. This should lead to increased profit margins in the years ahead. However, the reduction travel and business development costs may only be a one-time benefit which I think will reverse when travel restrictions ease.

Risks to consider

There are always risks to keep in mind with any potential investment, and Keywords Studios is no different. In the past, I’ve been concerned about how acquisitive the company has been. Since the initial public offering (IPO) in 2013, Keywords Studios has completed over 50 acquisitions. This is over six per year. Acquisitions can be an excellent way to grow a business, but there’s no guarantee they will be successful. The fact that Keywords Studios’ management has to analyse and integrate so many acquisitions per year may also become time consuming as the business grows further. The company has managed this very well so far though.

The valuation also stopped me buying the shares in the past. Based on a forward price-to-earnings (P/E) ratio, the stock is currently valued on a multiple of 35. I still view this as a touch high, but this is now much lower than the P/E ratio of 49 from last year.

Keywords Studios stock: is it a buy?

I’m considering buying the stock today after the trading update. Keywords Studios is operating in a sector with strong catalysts for growth. The company has also been able to control costs well during the pandemic. The valuation is more compelling than it was last year too.

So the stock is a buy for my portfolio.

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Dan Appleby has no position in any of the shares mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Keywords Studios and Microsoft. 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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