If you’re looking to generate strong investment returns, it can pay to look outside the FTSE 100. Further down the market capitalisation spectrum, there are hundreds of exciting companies that are growing at a much faster rate than your average FTSE 100 firm. With that in mind, here’s a look at one such AIM-listed stock I like the look of right now.
Keywords Studios (LSE: KWS) is an under-the-radar company that specialises in video game technical and creative services, such as game development, functional testing, localisation, and art creation.
The group works with nearly all of the world’s largest video game developers, including Epic Games (Fortnite), Activision Blizzard (Call of Duty), and Electronic Arts (FIFA) and has operations in the US, Europe, and Asia. The stock currently has a market capitalisation of just under £900m.
The reason I see investment appeal in Keywords is that the video game industry is booming right now. Believe it or not, video games now bring in more revenue than the film and music industries combined.
While estimates vary, some analysts believe the gaming industry could be worth a staggering $300bn by 2025. As a ‘picks-and-shovels’ play on this high-growth industry, I think Keywords could do very well in the years ahead.
A trading statement from Keywords today certainly looks encouraging. For the year ended 31 December 2019, Keywords expects to report full-year revenue of approximately €326m (the consensus forecast was €317.9m), which would represent a 30% increase on the year before.
On an organic basis, revenue growth of 15% is expected (17.3% last year). Not bad when you consider 2019 was a “relatively light year” for the video game industry, according to the company.
Meanwhile, adjusted profit before tax is expected to rise around 8% on last year, and adjusted EBITDA is anticipated to rise around 13%. The reason profit growth is expected to be lower than revenue growth is the group had to integrate a number of early-stage technology businesses acquired in 2018 and also made investments during the year to support future growth.
It believes this investment will enable it to continue to deliver high levels of growth as it positions itself as the “go-to global services platform for video games” in a market that’s seeing an “accelerating trend towards outsourcing.”
Looking ahead, Keywords believes the launch of a new generation of gaming consoles (both Xbox and Playstation are releasing new consoles this year) and the further development of new streaming platforms, will drive “continued strong demand” for its services through 2020 and beyond.
KWS shares have pulled back by around 5.5% on the back of today’s trading update, and I think this share price weakness could be a good buying opportunity for long-term investors, as the stock’s forward-looking P/E ratio is now under 25. Given the growth potential here, I see that as an attractive valuation.
Edward Sheldon owns shares in Keywords Studios. The Motley Fool UK has recommended Keywords Studios. 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.