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.

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?

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

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.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

How I’d apply the Warren Buffett method to buying shares

Learning from billionaire investor Warren Buffett, our writer explains his own approach to investing in shares for his portfolio.

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

This dividend share yields under 1% — but I’d still buy it

This dividend share has a low yield. So why would our writer consider adding it to his income portfolio?

Read more »

Young lady working from home office during coronavirus pandemic.
Investing Articles

Looking for a good share to buy? Here’s how I do it

Here are two approaches our writer uses when hunting for a good share to buy for his portfolio to aim…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

One cheap FTSE 100 share I’d buy for a new bull market

This FTSE 100 share is unloved and starting to look seriously cheap, says Roland Head.

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

How I’d invest £500 in UK shares in 2022

Investing a small amount of capital in UK shares can result in high commission costs. Zaven Boyrazian explains how to…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

2 battered FTSE dividend stocks to buy in July!

I'm still searching the FTSE 100 for the best bargains to buy. I think these two big dividend shares are…

Read more »

Woman pulling baffled face
Investing Articles

Can I trust Lloyds’ 6.1% dividend yield?

The Lloyds' share price has sunk in 2022, causing the bank's dividend yield to leap. But can I really trust…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

3 top stocks to buy before the market rebounds

Edward Sheldon highlights three beaten-up stocks he'd buy before global stock markets stage a recovery from their 2022 declines.

Read more »