The Frontier Developments (LSE: FDEV) share price has been in freefall for a while now. In fact, it’s down over 60% from the value it hit last April.
As someone willing to look beyond short-term wobbles and build my wealth over many years, is the UK’s largest game developer and publisher now a screaming buy?
Well, recent trading has hardly been awful.
Rising revenue
Back at the start of 2022, the AIM-listed company reported a 33% rise in revenue in the six months to the end of November. At least part of this was attributed to the release of its latest game: Jurassic World Evolution 2. However, older titles such as Planet Coaster and Planet Zoo were still selling well.
Despite the presence of Omicron, this momentum continued into the important pre-Christmas shopping season. Frontier delivered its highest-ever December revenue in 2021.
So, what gives?
Scratch the surface, however, and the drop in the Frontier Developments share price starts to make more sense. Gross profit margin has been falling and marketing costs have been rising. The “disappointing launch” of a bug-plagued expansion to one of the company’s most popular titles — Elite Dangerous — didn’t help matters.
The valuation also started to look (very) frothy given that pandemic-related lockdowns were now in the past.
Chinks of light
On a more positive note, Frontier does have an interesting line-up of titles due for release soon. This includes its first highly-anticipated Formula 1 management game, as part of a multi-year agreement with the franchise. Frontier Foundry, the firm’s label for third-party publishing, will also be releasing a number of titles with the view to it becoming a “material contributor” to the company.
In addition to this, the Cambridge–based business expects a resurgence of demand for the aforementioned Jurassic World Evolution 2 when the final part of the Jurassic World trilogy (Dominion) comes to cinemas in June.
All of the above help to explain why analysts believe earnings will jump in FY23 (beginning 1 June). This, in turn, brings the valuation down to a P/E of 28. That’s still hardly cheap. Even so, it is more attractive than the 47 times earnings price tag Frontier had back in December.
Risks to consider
This is not to say the worst is over though.
The higher cost of living could force many to put off the purchase of their next game(s). Even something as simple as better weather could be enough to impact demand and, consequently, the Frontier Developments share price.
Further delays to games are also a possibility. The £500m cap’s Warhammer Age of Sigmar strategy game has already been put back to FY24 in an effort to improve its “quality and longevity“.
A cautious buy
The next update on trading will be in early-to-mid June. Assuming the concerns mentioned above haven’t come to pass, I wouldn’t be surprised to see the Frontier Developments share price finally change direction. This is, however, dependent on it hitting previous revenue guidance of between £100m and £120m.
On reflection, I certainly wouldn’t go ‘all in’ today. However, I do think a lot of negativity is now firmly priced in.
It might not be a screaming buy but I’m more tempted than ever to begin building a position.