The Frontier Developments (LSE:FDEV) share price collapsed 25% today after the company released its half-year report. This latest drop has pushed the stock’s 12-month performance to a devastating -60% return for existing shareholders like me. So let’s take a look at what’s going on and whether I should be concerned.
Frontier Developments’ share price versus earnings
As a quick reminder, Frontier is a game development studio behind several popular franchises, including Elite Dangerous, Planet Coaster, Planet Zoo and Jurassic World Evolution.
Despite the post-trading update share price collapse, the results had some promising aspects. Most notably, revenue for the six-month period ending in November 2021 grew 33%, reaching £49.1m. This growth is mainly attributable to the release of Jurassic World Evolution 2, combined with continued sales from existing titles and expansion packs.
Sadly, the increased sales didn’t translate into higher profits. Due to marketing expenses promoting the launch of Jurassic World and license royalty fees for the IP, EBITDA came in at £14.1m – a 10% drop versus a year ago.
Combining this with adverse movements in foreign exchange rates, the group ended up reporting an operating loss of £1.3m. Needless to say, that’s not a welcomed sight. So seeing the FDEV share price fall as a consequence is hardly surprising to me.
Looking to the future
As frustrating as it is seeing profits dwindle, the situation may only be temporary. December sales volumes, which reached record-breaking highs, weren’t captured in this latest report.
Meanwhile, two new games, FAR: Changing Tides and Warhammer 40,000: Chaos Gate – Daemonhunters, are being released through its publishing arm later this year. Frontier’s first annual release of Formula 1 management games is also coming out in the second half.
Meanwhile, the June release of the Jurassic World Dominion movie is expected to dramatically boost sales of its Jurassic World Evolution 2 game. And with another Warhammer title scheduled for 2023, future growth prospects continue to look solid, in my opinion.
Overall, management has updated revenue guidance for its FY2022 ending in May to be between £100m-£120m. And the outlook for FY2023 has been revised to £130m-£160m. Both are lower than the guidance provided earlier in 2021, and that has most likely contributed to the rapid decline of the FDEV share price today. However, the updated figures still imply a double-digit growth rate, which is an encouraging sight. At least in my view.
The bottom line
All things considered, my perspective on this business hasn’t changed on the back of this report. The reduced guidance and seemingly temporary drop in profitability aren’t great. But the company’s long-term potential and pipeline of future projects continue to look promising.
Therefore, today’s drop in the FDEV share price seems like a potential buying opportunity for me to increase my existing stake.
