London’s clutch of video gaming stock prices are approaching the bottom and, after valuations have recently dwindled they now offer opportunity, that’s according to Liberum Capital.
Game developers Team17 Group PLC (AIM:TM17), Frontier Developments PLC (AIM:FDEV), Devolver Digital Inc (AIM:DEVO) and tinyBuild Inc (LSE:TBLD) were all rated as ‘buys’.
Nevertheless, there have been more bullish sector views.
“2023 is likely to be a more challenging year for gaming companies following two very strong years and as consumers start to feel the pinch from a recession,” Liberum analyst William Larwood said in a note.
“However, valuations are at cyclical lows and our estimates have been conservatively set. Our base case is for a relatively mild recession.
“We see many reasons to be optimistic and believe that current share prices offer an attractive opportunity to invest in a sector with multiple structural growth drivers. As such, we see value across our coverage.”
Liberum noted that 2022 was a record-breaking year for mergers and acquisitions – which were largely skewed towards the blue-chip end of the sector, most notably Microsoft’s acquisition of Activision, Take Two’s takeover of Zynga and Sony’s deal for Bungy.
Smaller deals are likelier this year, though could mean that independent lower budget developers may find themselves in the crosshairs.
“We expect this consolidation trend will continue in 2023, albeit on a smaller scale than 2022,” Larwood added.
“We expect the large publishers and big tech companies such as Embracer, Sony, Tencent, Microsoft and Take-Two and Amazon, to be the main acquirers.
“We are also likely to see continued investment in the sector, in both private and public spheres.”
Stock takes
Team17 is rated as a ‘buy’ at Liberum with a target of 605p, suggesting nearly 40% upside to the current price of 467p.
Liberum says Team17’s 2022 results bucked the trend of other publishers and were “impressive given second half weighting to new releases.”
Larwood reckoned: “We believe a premium valuation is warranted given the diverse portfolio, best-in-class lifecycle management and history of beating market expectations.”
Frontier Development shares tanked in January as a profit warning revealed that its F1 manager game launch that came with high expectations did not live up to them – and it flagged that full-year operating profit to come in below market consensus forecasts of £19mln.
“Higher development costs and lower revenues from new titles have left investors cautious over Frontier,” the Liberum analyst added, whilst arguing that downtrodden share price have overdone the worry. The broker has a ‘buy’ rating with a 570p target, versus the current market price of 500p.
“We see good potential in Warhammer Age of Sigmar in FY24. Finally, the FY25 own-IP release is within Frontier’s tried-and-tested genre of ‘creative management simulation’, lowering future execution risk.
“The share price doesn’t reflect this and more than factors in the risks.”
Devolver Digital share price offers an “attractive entry point” after the recent disappointment of its 2022 earnings miss. Taking a view on the potential recovery, Liberum retains a ‘buy’ with a reduced target price of 50p, from 95p, compared to the market price of 34p.
“Second half releases demonstrate Devolver can deliver high-quality titles that sell well and receive awards. Metrics for new titles released in 2023 are encouraging and trending well.”
Hello Neighbour maker tinyBuild was meanwhile upgraded to ‘buy’ on valuation grounds with Liberum pointing to the share’s 55% discount versus peers Team17 and Devolver Digital.
The broker added that tinyBuild’s valuation gap is the largest its been since listing which is it says it unjustified.
tinyBuild is rated as a ‘buy’ with a 130p target.
Separately, Liberum spotlighted video games contractor and service provider Keywords Studios which is marked as the broker’s ‘top pick’ among London’s tech shares.