Seeing volatility among growth stocks isn’t uncommon. After all, with a lot of expectations usually baked into their share price, investors have a habit of getting impulsive when something goes wrong, even with minor hiccups.
But this behaviour can also lead to interesting opportunities for long-term investors, especially when shares start trading near their 52-week low.
Seeing a once-thriving stock plummet to near its lowest point in a year tends to indicate one of two things. Either there’s something fundamentally wrong with the underlying business, or overreacting investors have created a buying opportunity. And in the case of Keywords Studios (LSE:KWS), I think it might be the latter.
What’s going on?
Keywords operate at the heart of the video game development industry. Working behind the scenes, it supplies critical talent to the biggest studios in the world, helping across the entire development pipeline from 3D modelling and programming to localisation and quality assurance.
This ‘picks and shovels’ enterprise has been a stellar performer over the last decade, with its market capitalisation growing by 900% since 2014! But lately, the growth stock hasn’t exactly continued this upward trajectory. On the back of the current economic landscape paired with a series of worker strikes in the US, growth has slowed significantly in 2023 to just single digits. And at the same time, operating profits have tumbled by nearly 35%!
Needless to say, that’s not an encouraging sign, especially after such a long winning streak. As such, I’m not surprised to see the share price has been almost slashed in half over the last 12 months. But is this all about to change?
Navigating cycles
Like other industries, video games operate in a cycle. Since modern titles can carry a fairly lofty price tag, gamers are becoming increasingly picky over where they will spend their money. This is especially true given the ongoing cost-of-living crisis here in the UK and abroad.
Yet this isn’t a risk that Keywords has direct exposure to. Don’t forget, regardless of the success of a title, Keywords still get paid. And the headwinds management has had to navigate in 2023 have already started to subside. That’s probably why CEO Bertrand Bodson has just reaffirmed the company’s revenue outlook of reaching €1bn within the next few years.
Acquisitions continue to play a crucial role in Keywords’ strategy. And such deals come paired with a lot of risks since there’s never any guarantee that performance expectations will be met post-transaction. Yet, management has so far proven its prowess at vetting takeover targets, as well as delivering long-term organic growth and value creation to shareholders.
The bottom line
With Keywords Studios trading near its 52-week low, the forward price-to-earnings (P/E) ratio for this growth stock now sits at just 13. That’s the cheapest this stock has looked in over a decade. And with tremendous long-term potential still ahead for this enterprise, it’s looking like it could be one of the greatest bargains on the London Stock Exchange today. At least, that’s what I think.
