The Codemasters (LSE:CDM) share price has been rising steadily this year, but it soared 20% in a single day on Monday.
The AIM-listed video game developer has had a stellar 2020. Shareholders have seen a brilliant 115% return this year, despite everything that has happened in the world.
So what specifically happened to light a rocket under the Codemasters share price?
Codemasters racing ahead
The share price jumped 108p, from 532p to 640p, in little under an hour on Monday 14 December. It’s a stunning surge for the racing-focused video game publisher.
The stock market reacted strongly to news that Codemasters had accepted a takeover bid from Electronic Arts. It means a potentially huge payday for existing investors. There has been a bidding war for the Warwickshire-based publisher, with the world’s biggest video game companies duking it out. In November, Take-Two Interactive put forward a cash and shares deal worth £750m ($980m). At the time, Codemasters said it had reached a formal agreement with the American giant. But Electronic Arts swooped in with a 604p cash offer for every Codemasters share. That values the company at £945m or $1.2 billion.
And the Codemasters board has changed its recommendation from accepting Take Two’s offer to Electronic Arts instead. Take-Two could still come back with a better offer, matching the Electronic Arts valuation. So there could still be value in looking at the Codemasters shares even at this elevated level.
Big profits, big value
That there’s value in buying AIM-listed gaming firms should come as no surprise. Video games, playable both online and offline, have soared in popularity during lockdown. They provide spectacular entertainment and easy escapism for the bored among us.
As Hargreaves Lansdown analyst Susannah Streeter said: “The pandemic has caused another major surge in the popularity of gaming.”
So there is a massive growing audience for video game producers. Alongside a new army of followers, changes to the way games are distributed has produced incredible money-making opportunities.
Codemasters going digital
Over the last five to 10 years there has been a strategic shift away from boxed games to digital downloads.
Distribution has switched away from brick-and-mortar video games stores to hugely popular platforms like Steam, Xbox Live, and Playstation Now. This lower cost of production means margins for video game publishers are increasing. In turn, the lack of physical game copies means ever improving profit figures for small producers, allowing for easier earnings growth.
Warren Buffett would be a fan of these companies for their economic moat. That means they have high margins and protected IP that no other company is legally allowed to sell.
As highly-profitable enterprises with stonking margins, these UK video game developers have become potential takeover targets.
More to come?
We have seen some major acquisitions in the video games industry recently. Most notable is the Microsoft $7.5bn takeover of Fallout and Elder Scrolls developer Bethesda and its parent company Zenimax.
I expect more mergers and acquisitions to come in future. And so what happened to the Codemasters share price could happen again to one of its AIM-listed stablemates, Frontier Developments or Team17.
