Sumo Group (LSE:SUMO) is a UK-based video game development and technical outsourcing firm. The FTSE stock has experienced some positive tailwinds in recent months after a takeover announcement back in July. More recently, a positive H1 results announcement last week benefitted it too. Based on all this, should I add shares to my portfolio?
Growth stock on the rise
As I write, shares in Sumo Group are trading for 485p per share. The FTSE stock’s share price is currently trading close to all-time highs. At this time last year, I could buy shares for 235p per share. At current levels, I would have seen a return of over 100% if I had invested back then.
In July, news broke that Chinese firm Tencent is taking over Sumo Group. Tencent is one of the biggest video game firms and one of its largest creations is worldwide sensation Fortnite. Sumo’s share price shot up. On 16 July, shares were trading for 358p per share. After the news broke, by 20 July, shares shot up by 40% to 503p per share.
Excellent results and takeover benefit
Sumo released an impressive H1 trading update on 29 September. It said that pretax profit for the six months ended 30 June stood at £3.7m compared to £2.8m in the same period last year. In addition, revenue almost doubled to £50.4m from £26.3m in the same period last year. Net cash also increased compared to the same period last year, which will solidify its balance sheet. I believe this positive performance reflects a FTSE stock on an exciting growth trajectory.
The £919m takeover by Tencent is a major positive for me. Tencent has a history of acquiring Western entertainment and culture businesses. It already has an influential stake in music, film, TV, and video games. In 2021 alone to date, it has invested in 60 different gaming firms. It is capitalising on the pandemic-related boom in gaming. The takeover should be complete by Q4, according to the recent results posted by Sumo. I believe this takeover will only benefit Sumo. It will expand its reach and enhance its offering too.
FTSE stocks have risks too
Sumo seems destined for bigger and better things in my opinion. Despite this, I must be wary of the risks involved too. Firstly, the Tencent take over of Sumo is not a cheap one by any stretch of the imagination. Shares were trading at 40 times forecast earnings prior to the takeover news. At the bid price of 513p per share, this has risen to close to 60 times earnings. This means two things to me. Firstly, the current share price is reflective of the price Tencent is paying and means further growth and positive results are already priced in. Secondly, if there were any negative news, the Sumo share price could fall sharply.
Overall I believe Sumo could be an excellent FTSE stock for my portfolio. I believe this takeover will only benefit it, and it could experience some exciting times ahead. As a potential investor, that could generate excellent returns for me. At current levels I would buy shares for my portfolio.
