It’s not hard to see why the recent listing of California-based video game platform Roblox (NYSE:RBLX) has attracted so much attention. After all, the gaming industry has been one of the biggest beneficiaries of multiple lockdowns over the past year.
Notwithstanding this, I’m not as confident as some that the share price will continue to soar from here, at least in the near future.
Now, don’t get me wrong. Roblox’s chief pull — allowing players to create avatars that can move between games, all of which have been built by members of its own community — is attractive. When players can switch from creating a theme park to racing a car to starring in a fashion show, it’s perhaps no surprise Roblox is one of the biggest-grossing apps on Apple and Google devices.
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However, the biggest concern for me is that Roblox isn’t profitable. The company posted a net loss of $253.3m in 2020. That was up significantly on the $71m loss reported in 2019 as a result of needing to pay developers more for their games.
Factor in the hyper-competitive nature of the industry, a frothy £37bn valuation, and suggestions that many US tech firms have already had their time in the sun and I’m wondering if we could be in for a bout of profit-taking.
Should this be the case, I think there’s a better way to play the gaming theme.
Top UK growth stock
Today’s full-year results from Dublin-based gaming services provider Keywords Studios (LSE: KWS) were as good as you might expect. Despite Covid-19 forcing many of the company’s employees to work from home, group revenue increased 14.4% to €373.5m. Pre-tax profit rose a whopping 86.6% to €32.5m. On top of this, Keywords ended the year with net cash (€102.9m), thanks in part to a successful €110m placing conducted in May.
The outlook for earnings looks just as good. As a result of new console launches (Playstation 5 and Xbox X/S Series), Keywords expects to see increased demand across its service lines “in 2021 and beyond.” Indeed, joint interim CEO Jon Hauck said the company was “very confident” in its future, thanks to “the continued trend towards outsourcing and an increased focus on content creation in a growing video games market.”
Buyer beware
All this surely bodes well for the KWS share price over the medium-to-long term. This isn’t to say there won’t be some volatility along the way. Although up more than 1,000% over the last five years, the KWS share price has suffered some not-insignificant reversals over this period.
Like Roblox, there’s also the possibility that demand for the shares may moderate as investors grow wary that even the most committed gamers will want to get outside more over the next few months. These things matter when it’s considered that KWS shares already traded on a heady 38 times forecast earnings before markets opened this morning.
Even so, I’d definitely feel more comfortable backing Keywords over Roblox. Aside from making real profits, the former is less focused on fickle young gamers. The ‘picks and shovels’ nature of its business also gives Keywords some earnings diversification that Roblox arguably doesn’t have.
That said, I’m happy to continue funneling my money into this gaming-focused fund instead.
