There was a time when the computer and video games industry was a small business. A computer game could be written by a single person, working from their bedroom. It is not like that now, and it has changed for a good reason. This reason partly explains why I think that this UK computer and video games company, which has been around since the 1980s, could be set to enjoy a stellar performance.
The reason is hardware. Purists say the hardware does not matter, rather it is design and the imagination that has gone into a video game that counts. If that is so, explain how the computer and video games business has grown so massively over the last two or three decades There hasn’t been an increase in imagination, games designers haven’t suddenly become more talented, but what has increased is computer power.
In its early days, Codemasters Group (LSE: CDM) sold budget computer games, typically selling for £1.99 for the Sinclair Spectrum and Commodore 64. As hardware became more powerful, games designers found that they could be more ambitious; graphics improved from blocks that had a vague resemblance to something real to graphics so realistic that it was hard to distinguish them from reality.
That’s what happens when state of the art becomes several thousand times more powerful.
The company itself was listed on the AIM market in June 2018. At first, the share price fell sharply, before rising. A few days before Christmas, its shares were trading at a new all-time high. Shares are up around 40% since August, but only 4% up on the IPO price.
The company is interesting for four reasons.
Firstly, it has recently announced that it has extended its contract with Formula One World Championship from 2021 to 2025, with the possibility of extending the contract further. In the latest half year, gross profits tallied £12m, yet the period saw just one release, a Formula One game. There is a good chance that the company can build on this franchise.
Secondly, it has recently acquired Slightly Mad Studios. Among other things, the deal means a new video game based on the Fast and Furious movie franchise.
Thirdly, the company is going digital. That means that the physical medium upon which its games were sold in the past is being replaced by digital delivery, carrying a much lower (almost zero) unit cost. This means that the company’s gross margins are likely to increase significantly – in its latest half year, gross margins increased by 89.0%
Finally, hardware is getting stronger. The latest smartphones now offer game-playing capabilities that leave dedicated games machines from a few years ago in the shade. Despite the emergence of a video games market in smartphones, the PlayStation Four has already proven to be the second biggest selling games station in history, but its shelf-life is far from over. Now the hype machine is focusing on the PlayStation Five.
For companies that specialise in racing games, such as Codemasters, processing speed and power is crucial – that is why its games are likely to get better and more popular.
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Michael Baxter has no position in any of the shares mentioned. 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.