Start-of-year trading hasn’t been kind to the Frontier Developments (LSE:FDEV) share price. Down 40% in Monday business at 601p per share, this cheap UK share has tanked after a troubling trading update.
I’ve been thinking about investing in Frontier Developments shares for a long time. Is this the dip-buying opportunity investors have been waiting for?
So what’s going on?
In a half-year update Frontier said that sales rose 16% in the six months to December.
The games developer and publisher said that sales of its internally-developed titles that were released before the current financial year had performed in line with expectations. Popular titles here include Elite Dangerous and the first two titles in its Jurassic World Evolution franchise.
But this is where the good news ended. It noted that sales of these titles had fallen below expectations during key price promotions last month. It also said that sales of its F1 Manager 2022 (which launched in August) had underperformed over the festive period as it witnessed “evidence of increased player price sensitivity”.
The AIM business also said it was reviewing its strategy for its Frontier Foundry third-party publishing arm. This is due to the division’s “mixed experience… of financial success” since it launched in 2019, as well as competitive market conditions.
Forecasts cut to 2024
Due to these pressures, Frontier no longer expects to meet broker forecasts. These suggested revenues of £135m and operating profit of £19m in financial 2023.
It also said that “the number of variables and the more challenging economic outlook” means the business now expects to make sales “of not less than £100m” this year. Frontier made record turnover of £114m in the previous 12-month period.
Sales of around £100m would result in an operating margin of 2% and operating profit of around £2m, Frontier said.
The firm also reduced its revenues estimates for financial 2024 and it now expects growth of just 5%. We’re told this reflects “current market and portfolio uncertainties, and the absence of new titles from Foundry” next year.
Time to invest?
As a UK share investor I’m excited by the rate at which the video games market looks set to grow. Analysts at Grand View research, for example, expect the global leisure software market to be worth $584bn by 2030. That’s more than double the $221bn it was valued at last year.
This is why I bought software services provider Keywords Studios in the spring of 2021. There are many other UK shares I’m considering buying to exploit this opportunity too.
However, following today’s news I don’t intend to buy Frontier Developments shares. The business is already struggling to shift key titles. Intense competition in the games market means that sales of these titles could remain weak beyond the medium term. Uncertainty over the future of Frontier Foundry adds another layer of risk.
Today Frontier shares carry a forward price-to-earnings growth (PEG) ratio of just 0.1. But despite this cheapness I’d rather find other British tech stocks to buy.
