The video gaming industry is booming at the moment. Here in the UK, gaming now accounts for more than half of the entertainment market. Meanwhile, globally, gaming now brings in more revenue than movies and music combined.
In this article, I’m going to provide a brief overview of the video gaming stocks listed on the London Stock Exchange. I’ll also discuss my top pick in the UK video gaming sector right now.
Team17
Team17 (market cap: £906m) is a leading UK independent video game developer. Its games – which are available on multiple gaming platforms – include Worms Rumble, Overcooked: All You Can Eat, Monster Sanctuary, and The Survivalists.
Team 17 has generated strong growth in recent years. Between FY2015 and FY2020, revenue jumped from £10.4m to £83m. However, this growth is reflected in the stock’s valuation. Currently, TM17 trades on a forward-looking price-to-earnings ratio of about 37.
Frontier Developments
Frontier Developments (market cap: £932m) is a UK gaming company that develops games across multiple platforms using its proprietary cross-platform technology, Cobra. Elite Dangerous and Planet Coaster are some of its popular games.
Between FY2015 and FY2020, Frontier’s revenue rose from £22.8m to £76.1m. Like Team 17, however, its growth is reflected in its valuation. Currently, the stock has a high forward-looking P/E ratio of 54.
Sumo Group
Sumo Group (market cap: £622m) is a gaming company that, through its Sumo Digital, Atomhawk, and Pipeworks Studios businesses, delivers end-to-end visual and development solutions to the video games industry. Its services range from visual concept design and pre-production through to development, user-interface design, and post-release support. It’s a co-development partner to some of the world’s largest top gaming publishers including Sony and Microsoft.
Between 2015 and 2020, Sumo’s top line rose from £21.6m to £68.9m. Currently, it trades on a forward-looking P/E ratio of about 41.
Keywords Studios
Keywords Studios (market cap: £1.85bn) is a leading provider of technical and creative services to the video gaming industry. Its services include localisation (translation), game development, art services, and game testing. It serves nearly all of the major players in gaming including Electronic Arts, Activision Blizzard, and Microsoft.
Keywords has grown rapidly over the five years through a combination of organic growth and acquisitions. Between 2015 and 2020, its revenue climbed from €58m to €373.5m. The stock currently trades on a forward-looking P/E ratio of about 40.
My top UK video game stock
In terms of my top pick from these UK video game stocks, it’s Keywords Studios. That’s the stock I own in my share portfolio.
The reason I like KWS is that it’s essentially a ‘picks-and-shovels’ play on the gaming industry. No matter which games are successful, Keywords should do well over time as the gaming industry grows.
Sumo, Frontier, and Team17 are all great companies. However, I see them as higher risk than KWS because they are focused more on game publishing.
KWS isn’t without risk, of course. It has a high valuation meaning that if growth stalls, its share price could take a hit. It’s worth noting that, in the past, its share price has been quite volatile.
However, I’m comfortable with the overall risk/reward profile. I see this UK video game stock as a long-term holding for my portfolio.