The Motley Fool

£5k to spend? The high profit stock I’d buy for my ISA and hold for a decade

There is one fast-growing high-profit stock I’m buying and will hold for the next 10 years.

I think Frontier Developments (LSE:FDEV) will be the next Rockstar.

The most successful, fastest-selling entertainment product ever? Not a Marvel movie. It was Grand Theft Auto 5, made by New York’s Rockstar Games, which is owned by Take-Two Interactive. GTA5 sold over 95m copies, pulling in $6bn globally. Take Two, incidentally, has seen its own share price rocket 300% in the last five years.

Why it works

Video games tend to do well in uncertain economies because of their remarkably low cost-benefit ratio. Players may spend £35 on a single game, but the worlds this gives them access to are so vividly realised they will play for many hundreds of hours.

David Braben, a computer programmer and game developer of stunning repute, made his name on the spacefaring title Elite in the 1980s. As CEO of Frontier he’s managed to keep hold of 36.5% of shares in the now-£400m market cap studio he founded in 1994.

If you’re already not a video game fan, most of this will probably be utterly mystifying, just as I will never understand why other people are obsessed with baseball, or Love Island.

Happily though, as a value investor all you’re really looking for are highly cash-generative businesses that are run with panache and skill and not loaded up with debt. That’s definitely the case with Frontier.

Keep it in house

This business has generous profit growth and crucially, a board policy of no debt. Frontier still to this day has no debt at all, which is remarkable given it employs 400 people and has attracted the attention of Chinese giant Tencent, which took a 9% stake in 2017 for £17.7m.

While Frontier has made serious money by taking large, well-known properties like Jurassic World: Evolution and turning those into popular games, it has also made a very clever strategic shift in recent years.

The focus now is to put most of its energy into developing and selling its own IP, like upcoming title Planet Zoo. This means higher profits, because it keeps copyrights and holds more of the long-term benefits in-house.

Hard cash

I like to invest in companies that are leaders in their field. It’s niche, sure, but there’s no-one to touch Frontier when it comes to tycoon games.

Braben’s strategy has worked. 2017 saw operating profits skyrocket 550% to £7.8m from £1.2m in 2016.

2019 revenue is up to £90m from £34m, earnings per share at a record 45.4p from 9.6p the year before. Net cash is the strongest position ever.

All the world’s a stage

The thing that makes Frontier such a great investment, in my opinion, is that it has realised how to keep customers spending much more on games they already own.

Frontier games always come with a huge aftersales market of DLC, or downloadable content. An upfront cost of £35 will be supplemented many times by smaller purchases of £10 here and £15 there as gamers pay again and again to expand their in-game worlds. This also keeps players playing long after they make their initial purchase.

Planet Zoo comes out on 5 November and already has a strong following from a successful beta release. All I will say is: winter, and Christmas, is coming.

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Tom owns shares in Frontier Developments. The Motley Fool UK has no position in any of the shares mentioned. 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.