The Frontier Developments share price has crashed. Time to buy?

The Frontier Developments share price can’t stop falling. Is it game over for investors? Not according to this Fool.

| More on:

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.

Businessman looking at a red arrow crashing through the floor

Image source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

The Frontier Developments (LSE: FDEV) share price has been in freefall for a while now. In fact, it’s down over 60% from the value it hit last April.

As someone willing to look beyond short-term wobbles and build my wealth over many years, is the UK’s largest game developer and publisher now a screaming buy?

Well, recent trading has hardly been awful.

Rising revenue

Back at the start of 2022, the AIM-listed company reported a 33% rise in revenue in the six months to the end of November. At least part of this was attributed to the release of its latest game: Jurassic World Evolution 2. However, older titles such as Planet Coaster and Planet Zoo were still selling well.

Despite the presence of Omicron, this momentum continued into the important pre-Christmas shopping season. Frontier delivered its highest-ever December revenue in 2021.

So, what gives?

Scratch the surface, however, and the drop in the Frontier Developments share price starts to make more sense. Gross profit margin has been falling and marketing costs have been rising. The “disappointing launch” of a bug-plagued expansion to one of the company’s most popular titles — Elite Dangerous — didn’t help matters.

The valuation also started to look (very) frothy given that pandemic-related lockdowns were now in the past.

Chinks of light

On a more positive note, Frontier does have an interesting line-up of titles due for release soon. This includes its first highly-anticipated Formula 1 management game, as part of a multi-year agreement with the franchise. Frontier Foundry, the firm’s label for third-party publishing, will also be releasing a number of titles with the view to it becoming a “material contributor” to the company.

In addition to this, the Cambridgebased business expects a resurgence of demand for the aforementioned Jurassic World Evolution 2 when the final part of the Jurassic World trilogy (Dominion) comes to cinemas in June.

All of the above help to explain why analysts believe earnings will jump in FY23 (beginning 1 June). This, in turn, brings the valuation down to a P/E of 28. That’s still hardly cheap. Even so, it is more attractive than the 47 times earnings price tag Frontier had back in December.

Risks to consider

This is not to say the worst is over though.

The higher cost of living could force many to put off the purchase of their next game(s). Even something as simple as better weather could be enough to impact demand and, consequently, the Frontier Developments share price.

Further delays to games are also a possibility. The £500m cap’s Warhammer Age of Sigmar strategy game has already been put back to FY24 in an effort to improve its “quality and longevity“.

A cautious buy

The next update on trading will be in early-to-mid June. Assuming the concerns mentioned above haven’t come to pass, I wouldn’t be surprised to see the Frontier Developments share price finally change direction. This is, however, dependent on it hitting previous revenue guidance of between £100m and £120m.

On reflection, I certainly wouldn’t go ‘all in’ today. However, I do think a lot of negativity is now firmly priced in.

It might not be a screaming buy but I’m more tempted than ever to begin building a position.

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 assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. 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.

More on Investing Articles

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

The FTSE 100 is on fire! Yet these 2 stocks still look cheap to me

Despite the FTSE 100 hitting record highs, there’s no shortage of undervalued opportunities across the index, says Ben McPoland.

Read more »

Female student sitting at the steps and using laptop
Investing Articles

Greggs shares: an outstanding bargain after crashing nearly 40%?

Shares of one-time market darling Greggs have been in foul form recently. But is this a once-in-a-blue-moon opportunity for our…

Read more »

Close-up of children holding a planet at the beach
Investing Articles

This FTSE 100 stock’s suddenly become the highest-yielder on the index!

The league table of FTSE 100 (INDEXFTSE:UKX) dividend stocks has a new number one. But our writer explains why there…

Read more »

Rear View Of Woman Holding Man Hand during travel in cappadocia
Investing Articles

Is this under-the-radar UK stock as cheap as its rooms?

Our writer’s been keeping an eye on a little-known UK stock that operates in a niche, but profitable, sector of…

Read more »

Young Caucasian woman holding up four fingers
Investing Articles

It’s a ‘Fabulous Friday’ for holders of these FTSE 100 shares!

Four members of the FTSE 100 (INDEXFTSE:UKX) are making their latest dividend payments today (11 July). Our writer takes a…

Read more »

Man riding the bus alone
Investing Articles

Check out this spectacular FTSE 250 stock

UK investors willing to look beyond the FTSE 100 can find some outstanding companies. Online advertising business Baltic Classifieds might…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

The JD Sports share price is down 18% in a year. And the stock’s only yielding 1.1%. Here’s what I’m doing…

With the JD Sports share price struggling and a tiny dividend on offer, there doesn’t appear to me much going…

Read more »

Passive and Active: text from letters of the wooden alphabet on a green chalk board
Investing Articles

How long would it take an owner of Legal & General shares to get their money back in passive income?

Our writer looks at the passive income potential of Legal & General, one of the highest-yielding shares on the FTSE…

Read more »