1. UK Video Gaming Sector Market Landscape

Video gaming industry has evolved over the years from simple gaming to multiplayer experience with live streaming and wider interactive features. Video gaming is often considered by many as the vital element of entertainment. During the pandemic, it was witnessed that more people played video games than ever before and the consumers who tried a new digital activity increased significantly. The gaming type can be categorized under console, tablet, smartphone, downloaded/box PC and browser.

The global gaming market was valued at USD 151.55 billion in 2019 and it is expected to reach a value of USD 256.97 billion by 2025. The market value is expected to grow at a CAGR of around 9.17% between 2020 and 2025. As per the survey, it was witnessed that video gamers spent 45% more time playing video games in the US amid the quarantine when compared to the previous week. On the global stage, the US, UK, Germany and France are some of the key markets for video gaming. As per Statista, the UK’s video game market is expected to have a revenue of around USD 3.5 billion in 2020. The video game market revenue is expected to grow at a CAGR of around 1.5% between 2020 and 2025 and reach a value of USD 3.8 billion. The mobile game is the largest contributor to the video gaming sector, and it is expected to have a revenue of USD 1.5 billion in 2020. The user penetration is 30.2% in 2020, which is expected to increase to 56.6% by 2025. 

The video gaming sector was highly popular during the covid-19 situation across the world as people spent the majority of their time at home. The interest of the people supported the gaming industry, and the video games is expected to contribute to more than half of the entire UK entertainment sector.

Key Trends in the Video Gaming Sector

• Cloud Gaming Service – It is currently trending in the video game industry and services such as Google Stadia, and GeForce No are already public. Cloud gaming often allows to play the AAA games as other platforms, but it differs from the traditional consoles and PCs in very significant ways. Rather than owning the hardware necessary to run high-end (or really any) video games like a gaming PC or console, game streaming lets users offload the processing demands to a company’s server.
• Virtual Sporting Event – The virtual sporting events have picked up during the pandemic, and it has united the game lovers and athletes around the world. The virtual events were already there, but the corona crisis has put these events in the limelight. The combination of sports and technology has become more popular. The increasing popularity of virtual sports can mainly be explained by the fact that they are increasingly reflecting the real sports.
• Mobile Phone Gaming – The smartphone has increased significantly over the past few years, and it will continue to boom with further smartphone penetration and improved data speed. The rising investment in the internet infrastructure along with hardware and software developments will improve the gaming experience on smartphones.

Risk Exposures to the Video 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.
• Breaches to Technology & Information Security – The sector uses various third-party and proprietary tools and technologies for process control and productivity purposes. It is important to continuously invest in such tools to remain up to date and effective. The industry requires the highest standards of security, and any security breach may lead to piracy, disruption of customers’ marketing plans, loss of competitive edge and could result in compensation claims.
• 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.

Benchmark Index Performance

Based on the 1-Year performance, the FTSE All Share Leisure Goods index has generated a positive return of around +69.39% and has outperformed the FTSE 100, FTSE 250, and FTSE All-Share indices with price return of nearly -10.62%, -4.26%, and -9.07%, respectively.

Fig 1: One Year Benchmark Index Performance

 (Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Video Gaming Sector Outlook

The pandemic was the perfect time for game studios, console makers, gaming service providers and the platforms that provide gaming service to convert casual gamers into long-term customers. One of the other key reasons that supported the growth of the gaming industry was the unavailability of in-person live entertainment during the lockdown.

The global games market is expected to generate a revenue of USD 159.3 billion in 2020, and the markets in the Asia Pacific region are expected to generate close to half of this revenue. The number of gamers is expected to increase three billion by 2023. The UK’s video games industry contributed £2.9 billion to the economy in 2019 as per TIGA. The UK Video Games Industry saw a growth of 17% between November 2018 and April 2020. The pandemic lockdown has contributed positively to the growth among the other factors. As per the recent survey conducted by the industry expert, it is seen that the people aged above 50 are also picking up the games to lessen boredom and it also helps them to stay in touch with their loved ones.

The demand for content will remain strong, which will be supported by new console launches, streaming platform development and increased gameplay. The supply chain of the gaming industry is improving as the industry is becoming more mature. A large number of gaming studios export some of the games in the international market, and the studios will continue to invest in the technology and the research & development. Gaming will continue to be considered as the most valuable entertainment media, and they are considered at par with film, television and animation. The key strategies for the UK’s video game sector are powering up small firms, building world winning games businesses, promoting games clusters to boost regional growth and enhance skills & education in the video gaming domain.

2. Investment analysis and stocks under discussion (SCT, KWS, CDM, and FDEV)

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

A. Softcat Plc (LON: SCT)

(Recommendation: Buy, Potential Upside: 9.62%, Market Capitalization: GBP 2.98 billion)

Softcat is a UK based provider of technology services and solutions having its footprint in the UK and Ireland. It has a customer base of 9,500 with over 200 vendors. The Company is listed on the FTSE-250 index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~9.62% over the closing price of GBX 1,489.00 (as on 12 January 2021).

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

B. Keywords Studios Plc (LON: KWS)

(Recommendation: Speculative Buy, Potential Upside: 13.37%, Market Capitalization: GBP 2.09 billion)

Keywords Studios is a leading provider of creative and technical services platform for the video game industry. It was incorporated in 1998 and now has its footprint in 21 countries. The Company is listed on the FTSE AIM UK 50 Index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the upside potential of ~13.37% over the closing price of GBX 2,758.00 (as on 12 January 2021).

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

C. Codemasters Group Holdings Plc (LON: CDM)

(Recommendation: Expensive, Potential Downside: 7.60%, Market Capitalization: GBP 1.00 billion)

Codemasters Group Holdings Plc is a leading developer and publisher of video games. The Company is specialized in high-resolution racing games and has a successful track record of 30 years in producing games. The Company is listed on the FTSE AIM 100 Index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the downside potential of ~7.60% over the closing price of GBX 646.00 (as on 12 January 2021).

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

D. Frontier Developments Plc (LON: FDEV)

(Recommendation: Expensive, Potential Downside: 12.30%, Market Capitalization: GBP 1.30 Billion)

Frontier Developments Plc is a UK-based software technology Company, engaged in the development of video games for the entertainment industry. The Company is listed on the FTSE AIM UK 50 Index.

Valuation Methodology

Our illustrative valuation model suggests that the stock has the downside potential of ~12.30% over the closing price of GBX 3,375.00 (as on 12 January 2021).

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

*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 13 January 2021.

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