Frontier Developments (LSE: FDEV) is a growth stock I am looking to buy in this new tax year.
The company reported revenues of £76m for the year ended 31 May 2020. That is less than the £90m reported for the 2019 financial year.
But Frontier had its biggest release to date in 2019, Jurassic World Evolution, which was tied to a movie release. 2020’s £76m of revenues was achieved without any new releases. Instead, a combination of a growing customer base, new content and platform releases kept revenues relatively high during the pandemic.
Its 2021 fiscal year is off to a good start, with revenues of £37m for the six months ended 30 November 2020, a £5m increase year-on-year. Gross and operating margins are solid at 71% and 19%, respectively.
It could have been better, but for a rise in development costs. The pandemic forced working practices to change and has pushed back a major game expansion release on consoles to 2022 and delayed the PC version. But Frontier has many existing planned and potential releases to come in 2021 and beyond, which bodes well for this gaming stock.
Frontier’s game lineup
Elite Dangerous is an (optionally) massively multiplayer online space simulation game in an accurate 1:1 recreation of the Milky Way galaxy. Elite came to PCs in 2014, and later to Xbox and PlayStation. Multiple expansions have been released over the years, expanding the game. The next big release, called Odyssey, will allow players to disembark their ships, explore, interact, and fight on foot. According to Liberium, Frontier’s official stockbroker, 1m copies of Odyssey might be bought on PC and console within the first year.
Planet Zoo and Planet Rollercoaster are simulation games that Frontier can continue to develop and expand. By 2023 gamers can look forward to Frontier releasing Warhammer Age of Sigmar under Games Workshop‘s licence. A Formula 1 tie-up is in the works, with the licence covering 2022 to 2025 F1 seasons. Frontier also has a string of third-part publishing titles in the pipeline.
A gaming growth stock
Frontier’s management has issued guidance for 2021 revenues of £90m and £95m this year. The upper end of that range would be a revenue record. According to games research provider Newzoo, spending on video games is expected to increase by 8% per annum to 2023, so I don’t think management’s target is fantasy.
However, I do need to remember that Frontier has only been developing its own titles since 2014. Before that, it was a work-for-hire outfit. This new business model and the forays into publishing licenced games, whilst so far successful, requires more people with different skill sets as the business grows. Then there is the pandemic, a boon for demand for games but – for Frontier at least – a delayer of game releases and revenues. Frontier does, however, have a healthy cash position, which offers me comfort.
What I particularly like about Frontier is that it is good at generating sales growth from existing games. It costs less to develop and market expansions: designers build on top of an existing idea and codebase, and existing committed players are fairly easy to reach and persuade. I think the strategy of continuing to nurture older releases rather than putting everything into the next release is a sound one. That’s why I have added gaming growth stock Frontier to my Stocks and Shares ISA year this April.
James J. McCombie owns shares in Frontier Developments. The Motley Fool UK owns shares of Games Workshop. The Motley Fool UK has recommended Frontier Developments. 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.