The video games industry is riding high at the moment and is showing no signs of slowing down. This strength has pushed me to look at UK gaming stocks to strengthen my long-term investment portfolio.
Last year, video games generated more revenue than the movie and sports sectors combined. The launch of new consoles like the PS5 and Xbox Series X helped cement video games as a key source of entertainment for stuck-at-home consumers and helped the industry add a host of new customers.
Here are two UK gaming stocks that I’d consider adding to my portfolio to cash in on the industry boom.
One company that stands out in UK gaming is Frontier Developments (LSE:FDEV). The company makes successful titles like Elite Dangerous, Planet Zoo, and Jurassic World Evolution and has followed several industry-tested principles to achieve its success.
A major source of revenue for video games is in-game purchases and paid downloadable content. As my colleague Zaven Boyrazian wrote, Frontier focuses on this using a “launch and nurture” approach, allowing it to make improvements and add content based on user feedback after launch.
This is evident when I look at its revenue for 2020. The company managed to generate £76m from in-game purchases alone without any new releases. Also, pre-audit revenue for FY21 is £91m, an all-time high.
The company have several exciting launches planned. Jurassic World 2, a sequel to its 2018 smash-hit, and an F1 management simulator (to release in tandem with the 2022 F1 season) are potential hits.
With such big releases planned, the board is predicting revenue between £130m and £150m in 2022. For 2023, projected revenue ranges between £160 and £180m, based on growing contributions from its third-party operation, Frontier Foundry. These are ambitious but encouraging figures for me, backed up by a host of releases.
But the industry is very crowded at the moment and Frontier Developments faces stiff competition from several large studios. Games get buried in an avalanche of releases and it could be the case here too.
Yet its robust business model and measured approach with releases show a lot of promise. I am looking to add this UK gaming stock to my portfolio in 2021. I think it can prosper in the next 12 months and beyond.
Sumo Group (LSE:SUMO) is another UK gaming stock I am considering for long-term returns. The company has a diversified portfolio of operating units like Sumo Digital, Atomhawk, and Pipeworks Studios under its belt. Sumo provides high-end visual design, concept development, and user-interface design to some of the world’s largest gaming publishers like Microsoft and Sony.
Sumo stock has gone up 11.18% in six months and a whopping 94.57% in the last year. It also managed a 13% return on capital and has a consistently high cash flow, which are encouraging signs. City analysts predict Sumo to become a robust UK gaming stock projecting a five-year increase of 287.97%, making it an excellent long-term investment that I am watching closely.
However, like Frontier, being a part of a highly unpredictable and competitive industry makes Sumo’s predicted increase no certainty. The lifespan of games is short, making it tough to establish steady profits. Yet Sumo offers a range of services to top companies in the industry and also makes smart acquisitions, making it a robust long-term investment gaming stock in my opinion.
Suraj Radhakrishnan has no position in any of the shares mentioned. 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.