The warning from Frontier Developments PLC (AIM:FDEV) earlier this month “raises deep questions” about the shares but Citigroup analysts said “we don’t think the model is broken”.
However, the bank's analysts downgraded its rating to ‘neutral’, with the share price having fallen by 12% since Monday's profit warning and “in reality it could have been worse. Indeed, based on earnings moves, it probably should have been”.
The Citi analysts cut their 2023/2024 forecasts by roughly 85% and 80%.
“The real questions, though, are (a) whether it's idiosyncratic or a function of market-wide pressures, and (b) what it means for the discount rate,” they said.
On the former, the analysts said Frontier’s lower-than-expected sales of F1 Manager and general underperformance from its Foundry third-party arm, “feels likely that pressure on consumer spend, enhanced competition and a flat ending to the F1 season (Verstappen winning with four GPs to go) has played a role”.
Looking ahead, there was also uncertainty around Foundry as management reassesses its strategy, with no game launches planned for 2024, they noted.
As the investment “has become more risky”, the Citi analysts have increased their discount rate to 10%, leading to a significant downgrade to the company's target price to 620p from 2,130p and removal of their ‘buy’ rating.