The outlook for the UK’s video game sector “looks better than ever” in the medium and long term, according to analysts at Liberum.
In a sector note on Friday, the broker said the development of video games as “platforms for socialising and other forms of entertainment” is resulting in “larger player bases who will engage for longer”.
READ: Keywords snaps up game development services group Climax Studios
“Games are transitioning into virtual, social worlds that take time away from other forms of entertainment. This creates larger, stickier audiences that can deliver structural growth”, Liberum said.
Meanwhile, the broker said a shift in revenue models including advertising, user-generated content and free-to-play AAA titles are “all presenting scope for monetisation”.
As a result, Liberum said given its structural growth drivers, “increasingly predictable revenue streams” and “highly valuable” intellectual property, the video games sector could “eventually re-rate towards [software-as-a-service] valuations”.
“Together these factors could help accelerate industry growth rates over time, with additional [mergers & acquisitions] offering support to multiples this year and beyond. We therefore see plenty of upside ahead, and would view any near-term weakness as a buying opportunity”, Liberum said.
With this in mind, the broker said accretive merger and acquisition activity from LSE-listed player Keywords Studios PLC (LON:KWS) could help “narrow its sector discount”, adding that they favoured Frontier Developments PLC (LON:FDEV) due to its “valuable IP portfolio and a release pipeline that can deliver significant earnings growth”.
With major acquisitions seen in Microsoft’s US$7.5bn purchase of ZeniMax Media and EA’s US$1.2bn acquisition of Codemasters, the analysts said they believe the market will consolidate further this year and beyond, whilst non-gaming tech businesses such as Tencent and ByteDance “could continue to acquire into the sector”.
Shares in Keywords were 0.1% lower at 2,613p in late morning trading, while Frontier was 1.4% higher at 2,545p.