#FDEV- Frontier Developments

Highly regarded game studio trading at significant valuation discount to peers following a series of setbacks and a collapse of margins.

TIKR link

https://app.tikr.com/stock/about?cid=112578214&tid=242568932&ref=lnv9v8

Market Cap £200m @ 500p, EV c£165m

Case Summary
Frontier Developments is a niche but highly regarded video game studio, particularly focused on simulation and creative management simulation games, using both own IP and third party IP. The company has a clear and differentiated long term strategy for reliable value creation, and has achieved relatively stable cashflow generation within this wonderful but somewhat hit-driven video game sector. 

The company was founded by David Braben, who remains the largest equity holder in the business with 33% of the shares (followed by Tencent with 9%). Despite recently stepping back from CEO to President in summer 2022, David is still involved in overseeing the business, albeit less intensely, and in ensuring that new CEO Jonny Watts (himself a longstanding FDEV veteran) settles into the CEO role successfully. 

The company has suffered a series of setbacks that has led investors to give up on the stock, and its market cap is now back to summer 2017 levels (and its EV even lower), despite today’s revenue being around 4x higher than the run rate at that time. 

In this note we will explain how…

• Frontier Developments actually has a less risky strategy than most video game peers, and how this strategy should provide a decent amount of downside protection to cashflows

• The company has been unlucky through a succession of sector and company-specific setbacks lately, and how these are not necessarily indicative of any further troubles to come

• There is scope for material results improvement from certain upcoming new title releases which could turn out to be meaningful both as financial and as reputational and sentiment enhancers

• The extent of the valuation discount should improve go-forward returns and should provide significant protection from permanent loss of value for a long term investor

• But there remain some niggling risks and concerns which will also be discussed, especially around the timing/shape of the hoped for recovery in results and sentiment.