While most businesses are struggling during the Covid-19 pandemic, the video games industry has been booming and shows no sign of slowing down! With more people stuck at home, the demand for couch entertainment has skyrocketed. This, combined with an easily adaptable work-from-home policy for game developers, has allowed studios to continue working at a regular pace. In 2019 the industry size stood at $149bn, but the growth stock in question today predicts that by 2022 it will be closer to $190bn with mobile gaming leading the charge!
Making a video game is expensive and quite risky. After all, if a studio releases a game that performs poorly, it can deal some real damage to the studio’s future, especially the smaller ones. With game studios looking to minimise risk, they often retain only a small team of permanent staff and utilise outsourcing for additional talent on a per-project basis.
This is where one of my favourite growth stocks, Keywords Studios (LSE:KWS), comes in.
Serving 23 of the top 25 games companies – including the likes of Activision Blizzard, Electronic Arts, and Microsoft – in over 60 countries around the world makes Keywords the largest player in the space.
This growth stock offers a wide array of outsourcing services from artists to programmers, in addition to quality assurance and marketing. But more importantly, its revenue is not directly dependent on the overall success of the projects they contribute to.
This method of revenue generation results in vast swathes of cash flowing in. This cash can be reinvested to expand profit margins as well as funding future acquisitions without needing to take on debt.
Subsequently, shareholders have enjoyed an explosive return of over 1,000% since 2016!
Top-line revenue has been increasing by an average of 49.19% year-on-year since 2016, while underlying earnings have increased from €6m to €21m over the same period. This impressive growth is a result of both organic growth from the expansion of end-to-end global services, and targeted bolt-on acquisitions of smaller service providers.
Acquisitions often carry some level of uncertainty, especially the larger ones. However, to date, the acquired studios are being integrated reasonably seamlessly into the service pipeline, without compromising the quality and productivity that customers expect.
The business model could easily be replicated by a rival firm. However, the reputation, size, and employee expertise offered by this growth stock have made it synonymous with success.
As such, the company can easily fend off competitors while charging a premium for its services that customers are more than happy to pay for.
The firm is certainly not without risk. Acquisitions can still turn sour if weak-performing or low-quality talent is mistakenly absorbed. Furthermore, the company reports its financial results in Euros, which does introduce some currency exchange risks.
Providing Keywords Studios maintains its track record of smart acquisitions and outstanding reputation, I believe investors may continue to reap incredible returns over the next five years and beyond!
Zaven Boyrazian 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.