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I think this AIM-listed video games company could be a bargain

Up until a few weeks ago, Codemasters (LSE:CDM) shares had enjoyed quite the ride, increasing by almost half between November last year and February.

Then the Covid-19 crisis happened. Shares have reversed all the gains seen in the previous three months.

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That may strike you as odd. Aren’t video games supposed to one of the products in high demand at the moment, as kids and indeed big kids, stay at home?

The reason for the fall is that one of the big Codemasters games lined up for this spring was Fast & Furious Crossroads, designed to complement the latest Fast and Furious movie. The movie release has been delayed, leaving a question mark over when the game will be available.

Codemasters had acquired the rights to the video games project after purchasing Slightly Mad Studious for $30m — mostly in the form of hard cash. So you can see why the share price collapsed.

The other big product

Codemasters is not a one-product company. It is not even a one ‘high profile licence’ company. It also has the exclusive rights to publish FIA Formula One World Championship.

I think the markets have over sold Codemasters for four reasons.

Firstly, because video games are going to be very popular this year.

Secondly, I think the absence of Formula 1 during the Covid-19 crisis will mean that the Codemasters game will offer racing fans an alternative.

Thirdly, Formula 1 itself is launching a series of F1 eSports. This will entail a series of virtual races instead of the actual races. These days eSports, when fans watch video games players compete with each other, are big business. The F1 series virtual series will be broadcast over the internet and will be based on the Codemasters game. This is a big deal for the company.

The fourth reason is that it was only quite recently that Codemasters announced a major shift to supplying its products digitally as opposed to in disc formats. This means the company’s margin has increased substantially. More to the point, in these difficult times, customers want digital games that they can play without having to go to a store or order online.

The upside may be worth more than the downside 

I think that that the share price is not allowing for the above factors. I expect Codemasters games to be very popular over the next few months.

Also, bear in mind that the company hasn’t lost the Fast and Furious licence. The product’s release will probably be delayed, but not cancelled.

I think the markets have sold because of the bad new and ignored the good news. That’s good news in the context of this company, of course. At a human level, I don’t think there is any good news at the moment.

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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.