These days, it’s getting harder to find quality UK growth stocks to buy at reasonable prices. That’s why I think it’s vital to look for parts of the market that should be able to justify these lofty valuations.
One example of this is the video games industry. While multiple lockdowns have proved a huge tailwind for games developers, the medium-to-long term outlook for this part of the market also looks very rosy indeed.
Picks and shovels play
Video games services provider Keywords Studios (LSE: KWS) is one way of playing this trend. Just a minnow a few years ago, the Dublin-based business is now a multi-billion pound company. Clients include top dogs such as Nintendo and Microsoft.
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Based on today’s trading update, I see no reason why this growth story is about to end. Keywords expects to report revenues of roughly €238m for the first six months of 2021. This would be a 37% increase on the same period last year, demonstrating that the company has bounced back well from the disruption caused by Covid-19. A “buoyant video games market” also saw adjusted pre-tax profit jump 80% to around €40m.
As you’d expect, shares command a high price. A P/E of 46 for FY21 looks punchy considering some parts of its business “continue to experience some COVID-19 related operational constraints.” Margins look set to be squeezed too as costs return following the lifting of restrictions.
Investors may also be concerned by the departure of CEO Andrew Day. While not rudderless (joint interim CEOs are in place), the loss of someone who oversaw such dramatic growth is a blow.
Nevertheless, I think the rising trend for developers to outsource work to companies like Keywords, coupled with its acquisitive strategy, should help support growth going forward. As far as the latter’s concerned, the AIM-listed stock isn’t short of cash either. Keywords had €84m in its coffers at the end of the trading period.
Another top growth stock
Of course, Keywords isn’t the only way of playing the rise and rise of video gaming. Publisher Team17 (LSE: TM17) is another growth stock I’ve been bullish on for some time. Its shares are up almost 260% since listing on AIM back in May 2018.
Also reporting to the market today, TM17 said trading to June had been in line with management expectations. Having snapped up app developer StoryToys last month, the company said it entered the second half of 2021 “in great shape.“
Once again however, shares are pricey (44 times earnings). Such a valuation could come back to bite if the global economic recovery slows. In fact, I’d say Team17 was a more risky proposition than Keywords since the latter’s multiple clients arguably mean its earnings are better diversified.
Then again, I wonder if the TM17’s interest in educational titles sets it apart from the competition. Following on from last month’s news on Sumo Group, I also wouldn’t be surprised if the firm was in the sights of a deep-pocketed suitor.
Cautious buys
Whether it’s buying a picks and shovels play like Keywords, a publisher like Team 17, or a passive fund tracking the industry, I think it’s hard to ignore gaming as an investment theme. While undeniably pricey, I reckon these growth stocks could still be cautious buys at this level.
