The year-to-date fall in the share price of Keywords Studios PLC (AIM:KWS, OTC:KYYWF), a mid-cap service provider to the gaming industry, is 'excessively pessimistic', according to a leading investment bank.
The stock has fallen 31% in that time with the downturn attributed to growing concerns around AI disruption, particularly impacting its Globalise division, which saw a 13% year-over-year decline in the second half of 2023.
But, according to Berenberg, the current market valuation of Keywords Studios does not reflect the reality of the current situation.
In a research note, analysts highlight that the drop reflects a cyclical downturn rather than a permanent shift, with expectations for recovery in late 2024.
"Our simple scenario analysis indicates that assuming Create continues to grow at 10% per annum, the shares are pricing in more than a 15% per annum decline in the Globalise and Engage divisions until 2030, essentially resulting in these businesses going to zero, which we deem too pessimistic," stated a Berenberg analyst.
As for the impact of automation, “we do not argue that generative AI has the power to disrupt the way that video games are made”, said the German bank.
“However, we disagree with the market’s assessment that all publishers gain in the form of higher margins and reduced capex, at the expense of outsourcers.”
Berenburg said that despite the challenging environment, Keywords continues to outperform the broader gaming market, which grew at 3% compared to Keywords' organic growth of approximately 9% in 2023, excluding impacts from US entertainment strikes and currency fluctuations.
Looking forward, Berenberg predicts that Keywords will resume organic growth in its Globalise division by the second half of 2024, supported by easing competitive pressures and resumed content production post-actors' strike.
The firm reaffirmed its 'buy' recommendation on Keywords Studios, with a price target of 2090p, suggesting significant upside potential from the current levels.
Keywords' shares are currently changing hands for 1,124p.