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Is the Team17 float an upward or downward indicator for the video game sector?

With an expected market cap of around ten times its 2017 earnings and a booming UK gaming sector, is the Team17 float the sign of a golden age or a coming crash?
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Team17's expected market value is predicted to be between £200mln and £230mln

Team17 has set itself up as the place to go for the UK’s indie games developers, which use its platform and infrastructure to hone and publish their creations.

And it seems like the strategy has paid off, with the company seeing its revenues more than double between 2015 and the end of last year to £29.6mln from £13.5mln, boosted by the success of indie titles such as the Escapists series.

READ: Video games label Team17 to list on AIM

With an expected market value predicted between £200mln-£230mln or around ten times last year’s revenue, the market is expecting big things.

What is not in doubt currently is that the UK games industry is booming

According to data from the Association for UK Interactive Entertainment (UKIE), the UK games industry alone was worth £5.11bn in 2017, an increase of 12.4% from the year before, and almost equal to the music and video markets combined, even with a surge in streaming usage.

The supply side of the market is also busy, with UKIE estimating around 2,175 active game developers in the UK as of August 2017.

With the penetration of broadband and smartphones almost ubiquitous in UK households and the easy accessibility to games from digital marketplaces such as Steam and Origin, indie developers have multiple avenues to reach consumers aside from tradition retail outlets selling physical copies.

However, even these numbers are dwarfed by the international gaming market, which according to estimates from gaming market intelligence site Newzoo was worth US$116bn in 2017, a 10.7% increase on the previous year.

Why float now?

All of these positive-looking numbers might point to why smaller game developers are deciding to float now.

One of the key drivers, as with many companies, is expansion.

Carl Cavers, founder of another recent AIM-listee Sumo Group PLC (LON:SUMO), said: “We raised an extra £5mln during the IPO to help us fund acquisition and we definitely see that on the agenda for the near future.

“The key thing for us is to extend our service offering,” he adds.

Sumo completed its float in December 2017 after raising around £38mln in new capital and currently holds a market cap of around £191mln.

Another potential reason for the rising number of game developer IPOs is the establishment of video games as an entertainment market that crosses demographics.

The average age of a gamer now stands at around 35 with a fairly even split of 49% and 51% between women and men respectively.

As a side note, the burgeoning esports sector could also drive investment, as companies such as events and group organiser Gfinity PLC (LON:GFIN) seek to corner the audience market for competitive gaming in addition to lucrative partnerships with brands and advertisers.

READ: Gfinity continues partnership with Formula 1 for new esports series

Of course, the long-term question is - can the rate of growth within the industry be maintained?

Concerns over market saturation and customer dissatisfaction over certain income generating practices such as lootboxes have already been aired.

Veteran gamers will also remember the industry crash of 1983 where revenues fell almost 97% from US$3.2bn to US$100mln by 1985 (equivalent to a drop from around US$8bn to US$250mln today).

The business, though, looks to be an entirely different beast these days.

Technology has made spectacular advances which show no sign of slowing – virtual reality, for example, is likely to be the next big thing.

Blue-chip game developers such as Electronic Arts Inc (NASDAQ:EA) and Activision Blizzard Inc (NASDAQ:ATVI) are now huge corporations and technology giants such as Apple Inc (NASDAQ:APPL) and Microsoft Corp (NASDAQ:MSFT) also are keen to get involved.

While that may suggest a difficult time ahead for indie developers, the reality is likely to be similar to the music industry, where this is the place new ideas and innovations are developed and tried before being picked up by the majors.

Trading in Team17 is scheduled to start in May of this year.

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