Falling oil prices have impacted the global economy this month and the UK stock market was no stranger to the pain. But a mild resurgence last week injected a small sliver of optimism into the market.
The UK gaming industry, in particular, has been the focus for some brokers. HSBC likes the chances of major sports betting outfit Entain (LSE: ENT), putting a Buy rating on the stock last Friday (13 September). Two days prior, Berenberg did the same for Frontier Developments (LSE: FDEV), a game developer based in Cambridge.
So what’s all the fuss about?
The up-and-coming gamer
Frontier Developments is a £97m market cap video game company listed on the London Stock Exchange’s AIM index. It grew to fame via its simulation builder games like Elite Dangerous and Rollercoaster Tycoon.
However, after trying different genres it lost money.
It’s now abandoned that strategy to refocus on its core strengths. Between 2021 and 2024 the share price fell 95% but recovered a bit this year, up 83%. Now at £2.46, it’s clearly far from its all-time high of £33 — but promising, nonetheless.
In its 2024 full-year results released on 10 September, it posted a 56p loss per share, widening a 54p loss from 2023. Both revenue and earnings experienced year-on-year declines of 15% and 2.7%, respectively. However, the results were mostly in line with analyst expectations, with EPS surpassing them by 2.8%.
It has a price-to-sales (P/S) ratio of 1.1, below the industry average and that of several of its competitors. With earnings forecast to grow at 130% per year, it’s expected to become profitable next year.
The stock looks to me like a bargain at this price and I think it could deliver excellent returns if the turnaround works. However, I’m hesitant to jump in right now. I’ll hold off on buying until I see those earnings materialise.
The well-established betting giant
As the parent company of popular high street betting shop Ladbrokes, Entain is a well-established £4.7bn outfit in the UK. But it’s had a rough time lately. With the share price plummeting 66% in the past three years, it became unprofitable in early 2023.
Are those days over now?
From a low of 503p in early August, it’s recovered 45% to 734p. Initial growth was attributed to increased betting during the Euros tournament, but it continued. Looks like something’s got punters back visiting the bookies (physically or digitally).
With the shares now undervalued by 59% and earnings growing, it’s on track to become profitable again this year.
So what’s driving the growth and will it continue?
Falling inflation and a strong Q2 trading update are likely the main factors, coupled with the appointment of new CEO Gavin Issacs.
But it’s not in the clear yet. Entain is performing well, yet evidence suggests it’s economy-dependent. It might keep doing well, but if inflation rises again, the share price could suffer.
Still, analysts have a 12-month price target of £9.30 on average, up 26.5%. That would be a decent windfall, considering I usually lose money at the bookies!
Yes, there’s a bit of risk but I like those odds, so I plan to buy the shares next month.
