Is this smoking-hot small-cap about to crash after six-bagging in one year?

The price of stock in Cambridge-based, AIM-listed, games creator and publisher Frontier Developments (LSE: FDEV) has been on fire recently, rising sixfold since this time last year.  

In the last month alone, the shares have almost doubled following news that the company has entered into a subscription agreement with Chinese internet giant Tencent, giving the latter a 10% share of the former in return for £17.7m. This move will allow Frontier access to an absolutely huge entertainment market as well as the cash it needs to continue growing its number of franchises.

Even more recently, Frontier announced its plan to release a game to tie in with next summer’s release of likely blockbuster Jurassic World: Fallen Kingdom. Available on PC, Xbox One and PlayStation 4, Jurassic World Evolution will be the £420m cap’s third major self-published game franchise and will begin contributing to revenues in the 2018/19 financial year.

Given recent developments, it’s therefore not surprising if investors were eager for today’s final results. And what a superb set of numbers they were.

Over the 12 months to the end of May, revenue jumped 75% to £37.4m, thanks largely to the launch of the company’s second franchise (Planet Coaster). Its first franchise — Elite Dangerous — “continues to perform well,” according to Frontier having been added to the Sony PlayStation 4 platform in June. 

The percentage growth in operating profit achieved by the company was even better, rising 550% to £7.8m over the reporting period (representing a 15% rise in margin compared to that achieved in 2015/16).

With figures like these, it’s perhaps not all that surprising that it ended the period with a net cash balance of £12.6m — almost 50% more than it had at the end of the previous financial year. 

As far as the future outlook is concerned, Frontier reiterated its desire to continue evolving and create “a self publishing multi-franchise success story“. Its understandably bullish CEO David Braben reflected that the company’s transition to a business-to-consumer developer over the last year had gone according to plan and that it is now aiming to double its output to ensure that this performance can be repeated. In a statement likely to delight those already invested, Braben also spoke of how his ultimate goal for the company was for it to emerge as a “global leader in entertainment,” highlighting the aforementioned cash injection from Tencent as pivotal for this to be achieved.

Still worth buying?

So, exciting times ahead. The question, however, is whether the shares still represent a decent investment after such incredible performance over the last year. With a trailing price-to-earnings ratio of 53, it would appear that a huge amount of optimism is already priced-in.

Given that disappointment often follows hype in the investing world, are the shares about to crash? Not necessarily. The gaming market — although subject to fads and fashions like anything else — appears both resilient and likely to grow massively over the medium-to-long term with the gradual adoption of virtual reality. Just look at the progress made by Keywords Studios over the last few years for evidence of how long stocks in this industry can continue defying gravity.

That said, even though there’s clearly a lot to like about this one, I’d be disinclined to invest right now. Should this seemingly perpetual bull market come to an abrupt halt, however, it would certainly be on my radar.