1. UK Gaming Industry Landscape

The gaming industry is arguably one of the most exciting and innovative sectors in technology today. Basically, a video game is an electronic game that can be played on multiple devices, such as a personal computer, gaming console or mobile phone. Based on the platform, video games can be classified into computer games and console games. However, the emergence of social networks, smartphones and tablets had introduced new categories such as mobile and social games in recent years. Video games have come a long way since the first game emerged in the 1970s. The most prominent players in the gaming industry are Tencent, Sony and Apple.

On a global basis, the US, UK, Germany, and France are some of the primary markets for the gaming industry. The UK has some of the most prominent video game studios in the world, such as Rare, Codemasters, Rockstar North, Criterion, and Creative Assembly. The video gaming sector had witnessed unprecedented growth during 2020, boosted by the significant increase in demand for home entertainment since the emergence of the Covid-19 pandemic. According to the NewZoo Global Games Market Data, the overall gaming industry market grew by around 19.6% to USD 174.9 billion during 2020 as compared to 2019. Moreover, the market is forecasted to grow at a CAGR of 7.6% to reach USD 217.9 billion by 2023.

The mobile gaming sector is anticipated to show growth of around 9.8%, the console sector to demonstrate an increase of around 7.4% and the PC sector is predicted to grow at 2.4% over the forecasted period. The Video gaming industry remained highly popular throughout the pandemic as people stayed in their home during the period and spent adequate time playing games.

Key Trends in the Gaming Sector

• Growing adoption of digital distribution – Improved internet speeds, larger hardware storage capacities, and lower footfall to retail stores are driving even stronger digital sales growth.
• Popularity of content creators and live streaming – The video game industry is widening across diverse range of demographics, new streamers and content creators boosted by the Covid-19 pandemic.
• Cloud delivery is the next big thing – The cloud gaming platform landscape is shaping up to be highly competitive, and differentiation will be key. 

Risk Exposures to the Gaming Sector

• Conduct and Compliance – The failure to adopt or apply ethical standards and fulfil legal and regulatory obligations and responsibilities. It could lead to financial penalties, reputational harm and loss of customer and investor confidence.
• Online Game addiction of kids – There are various risks for kids which can adversely impact the well-being as games offer young people as a sense of escape from the reality of the world.
• Regulations on Video Games – Changes in regulation on video games, such as those seen in the Chinese market, which imposed curfews on minors, could result in the delay or cancellation of video games by the customers.

SWOT Analysis

Benchmark Index Performance

Based on the last one-year performance, the FTSE All-Share Leisure Goods index has outperformed the FTSE 100 index, FTSE 250 index, and FTSE AIM UK 50 index. Furthermore, the FTSE All-Share Leisure Goods index generated a return of about 76.25%; however, the FTSE 100 generated a return of around 20.32%, FTSE 250 produced a return of around 39.99% and the FTSE AIM UK 50 index generated a return of about 54.25%.

Figure 1: One Year Benchmark Index Performance

 (Source: Refinitiv, chart created by Kalkine Group)

Gaming Sector Outlook

The gaming industry had outperformed the movies and the sports industry during 2020 and remained the best performing sub-sector in the entertainment sector. Since the emergence of the Covid-19 pandemic, the gamers got increased opportunity to download new games and consoles as they spend most of their time at home. Based on the current growth rate, the gaming industry would reach approximately USD 300 billion over the span of the next five years. Meanwhile, the number of mobile gamers is expected to reach 250 million in Southeast Asia during 2021. Furthermore, esports has become an extremely popular type of gaming within the African and Middle East region. The increasing penetration of gaming in Europe has led to people playing on average 8.6 hours per week. Game developers are consistently thriving to enhance the gamers’ experience through the advancement of technology, such as Xbox, Windows PC and PlayStation, which are integrated into one product offered to the gamers via the cloud platform.

2. Investment analysis and stocks under discussion (GAW, KWS, RNK)

After gaining insights into the gaming sector, we would look at the business model of three gaming players listed on the London Stock Exchange. 

A. Games Workshop Group PLC (LON: GAW)

(Recommendation: Buy, Potential Upside: 16.73%, Market Capitalization: GBP 3.46 billion)

Games Workshop Group PLC (LON: GAW) is an FTSE-250 listed Company, which manufactures miniature figures and games. The Company serves independent retailers globally through its retail stores and online channel.

GAW expects to release a full-year trading update for FY21 ending 30 May 2021 in June 2021.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.73% over the closing price of GBX 10,550.00 (as of 04 May 2021).                                                                   

B. Keywords Studios PLC (LON: KWS)

(Recommendation: Speculative Buy, Potential Upside: 18.15%, Market Capitalization: GBP 1.91 billion)

Keywords Studios PLC (LON: KWS) is an FTSE AIM UK 50 Index listed Company. The Company is engaged in the business of providing creative and technical services platform for the video games industry. The Company was established in 1998 with over 65 facilities in over 21 countries.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 18.15% over the closing price of GBX 2,548.00 (as on 04 May 2021). The next important support level is at GBX 2,199.00.

C. Rank Group PLC (LON: RNK)

(Recommendation: Hold, Potential Upside: 10.72%, Market Capitalization: GBP 919.06 million)

Rank Group PLC (LON: RNK) is an FTSE 250 listed multi-channel gaming operator, serving in Britain since 1937. Moreover, it has evolved from origins in motion pictures to a well-established gaming-based entertainment brand.

On 19 August 2021, RNK expects to announce full-year results ending 30 June 2021.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 10.72% over the closing price of GBX 196.20 (as on 04 May 2021).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 05 May 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective speculative buy stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

Disclaimer

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