Frontier Developments Share Discussion Threads

[sogoesit] 08/9/2021 18:18

Ok, understood, Adam. TBH I don't have a feel for how the Foundry part of the business is going to work financially at all. And, in any case, we have little/no information on either business segmental financial performance or games' segmental performance so I'm in the dark for the more detailed view. Tks for comment on the operational gearing issue.

[adamb1978] 08/9/2021 13:05

Hi Sogoesit Many thanks for the compliments. I should clarify one comment, which I think came across wrongly looking at your reply. When I said "R&D spend for FDEV should taper off" I meant that the rate of growth should taper off. On the simplifying assumption that the same amount of engineering time is needed for each game, but only FDEV-developed games, then as there is an increasing amount of 3rd-party games which use FDEV's foundry offering, the proportion of R&D to revenue should decline (or similarly, the growth rate of R&D spend should decrease). Those 3rd party games will be lower gross margin but, per above, involve lower/no R&D spend...so net them might be similarly profitability. Operational gearing - you're probably right and the peers which I've looked at have EBITDA margins on average around 40%-45%, so in the same range of FDEV. Profit growth therefore comes from topline growth, and therefore its helpful that they're guiding to £160m - £180m in the year to May-23! Adam Adam

[sogoesit] 08/9/2021 11:15

Many thanks Adam for that comprehensive reply. Appreciated. I hadn't done any recent guesstimates myself but had been working on a rough 45% EPS growth trajectory. For TTM EPS of 53p this would have given me 77p forecast for the current year..coincidentally with yours! If I value it at a PEG of 1 then my forecast share price in a year is £34.65. However, on viewing the results today, I don't think my previous assumptions still stand based on lack of margin expansion and the alternating "dull" year which dampens growth and expectations for growth. Thus your P/E 30x caught my attention. You mention R&D spend but I think in a business like this a reduction in R&D will be unlikely (but that's just a judgement call). The only area where there may be earnings expansion is operational gearing (or their costs reducing if they get back to "normal" following Covid disruption). But it doesn't appear to me to be a business where there are any economies of scale as, in my imagination, each Title is produced in a silo and the software is a sunk (capital) cost. Of course there is always the positive speculative side that a new release Title will be a big hit compared to historical performance and speculation about this, F-1 for example, may provide enhanced valuation perception. Conclusion, maybe not as low as 20% pa but certainly my 45% pa growth needs revising. Thanks for your ideas.

[adamb1978] 08/9/2021 10:43

Hi Sogoesit Market forecasts are £141m and 72.6p EPS for year to May-22. THeir guidance is 130-150m revenue so the top line isnt aggressive, particularly as FDEV have a record of guiding and then beating. My EPS forecast is 77p - I assume gross margins decline from 70% to 65% due to more 3rd party titles and then trend up opex. (edit: I was at 79p but just added more R&D). At 2700p, thats a PE of 35x which given the growth and returns, I think is fine. One challenge I have in thinking about how the cost base expands is that with more third party titles, then the R&D spend for FDEV should taper off - it should be linked to growth in their own revenues but I haven't seen estimates for the breakdown of revenue. I don't think my figures are aggressive as I have EBITDA margins of c42% going forward whereas the last two years are a couple % points higher. I dont see this as doubling in the next 1-2 years, but I think is a solid bet for making say 20% p.a. Adam

[sogoesit] 08/9/2021 09:59

Hi AdamB1978, What is your "current year" (1 April 2021 to 31 May 2022?) EPS forecast that gets you to a P/E of 30? (The trailing P/E is currently 50x on reported EPS of 53p).

[adamb1978] 08/9/2021 09:39

Not being someone who tries to time markets, its difficult for me to comment on the comments above I would say though that I somewhat agree with the comments about compelling reasons to buy now if you're looking for hyper growth. However the market forecasts for FY22 are very conservative in that they have EBITDA margins dropping to around 37% from 44% in Fy21 which even with more third party titles, seems low to me given that it implies that the incremental turnover from FY21 to Fy22 is possibly only generating around 28% margins. On a more reasonable assumption, they're on a PE of just over 30x for the current year, which doesnt seem crazy given the growth and c.20% ROCE

[scooper72] 08/9/2021 08:08

Hi Bamboo2 - I decided yesterday on the 7th that u mentioned, to take out my capital from my trading holding and just leave the profits from that particular holding invested, as it clearly wasn't pushing through the resistance. I guess the task now is to figure out how far it will retrace before having another go of moving through the high 20s.

[sogoesit] 08/9/2021 08:06

Agreed pinkfish, I think next catalyst for price is from November with release of JW-2.

[adamb1978] 08/9/2021 08:05

Decent results, growth trajoectory continuing. On a PE of around 30x for the current year, which I dont think is crazy given the growth which they're producing. Happy to continue to hold

[p1nkfish] 08/9/2021 07:56

Good luck whatever the decision but I don't see a need to rush to buy at the moment.

[sogoesit] 08/9/2021 07:23

Sooo.. the rhythm continues; a “dull” year past (19% revenue growth) into an exciting year now (43% revenue growt) presaging a dull year (23% revenue growth) for FY23…. Can margins increase or are they stuck at 22%? Hmmm… predictability or volatility from risk of delivery?

[p1nkfish] 01/9/2021 20:25

A point of balanced indecision.

[scooper72] 01/9/2021 19:46

Cheers bamboo. It seemed to hold its price today. I never quite understand how the volume of shares changing hands makes a difference but at the moment the volume does seem a bit low. Perhaps that picks up once the resistance is broken?

[bamboo2] 01/9/2021 18:46

scooper, price is making another attempt at the overhead resistance. My guess is that it will push through. One of my charts says a possible turn coming up Tuesday 7/9/2021 Not sure at this stage how that works with the idea of the figures around this time. Could be worth watching trend into the start of next week.

[scooper72] 01/9/2021 14:28

Thanks Bamboo2. Starting to wonder if this might be effected by any waves of reaction to the Chinese state's decision to limit under 18s to 3 hrs gaming a week.

[p1nkfish] 31/8/2021 08:34

Chinese crack down is a concern to part of the segment and will have some negative effect. www.cbsnews.com/amp/news/china-limits-online-gaming-children-3-hours-week/

[bamboo2] 29/8/2021 15:08

Sogo, Tradingview saying 8/9/2021 scooper, price has hit historical resistance approx 2850 and is testing the invh&s neckline and 200sma from above. The stock price is above rising 50 and 200 smas. I'd be holding right now. eod close below 2700, would suggest otherwise. edit, in retrospect eod close below 2660 is more precise.

[sogoesit] 29/8/2021 12:52

Discussion about the Metaverse (but no mention of the games producers!)... htTps://www.investorschronicle.co.uk/news/2021/08/25/the-metaverse-is-the-future-for-consumer-businesses/ Full Year Results due "Early September 2021" Last year on 9 September. Might the rally continue into results day? (The current rally projected would meet the declining trend line of recent "peaks" for "next peak" at approx. 3010 on my weekly charts. Support is 2130/2300). htTps://www.frontier.co.uk/investors/financial-calendar

[scooper72] 27/8/2021 09:38

Thanks Bamboo2. I've got two separate holdings. One that I just top up when it gets back to low 20s. But the other one I am thinking might be worth taking profits on as the recent high of about 2800p seems lower than the two earlier peaks this year and it might pull back to the recent support level around 2100p. Any words of wisdom on this?

[ck1111] 26/8/2021 07:18

JWE2 release 9th Novhttps://youtu.be/isKS2-xa5-8

[bamboo2] 22/8/2021 13:48

Trendline and 200sma working as resistance, but closely aligned as they are, should be possible to push through, additional volume and a build in momentum required. Friday showed a potential high turn.

[p1nkfish] 17/8/2021 11:23

MACD crossed over on weekly from what I can see. Might be best to confirm on close Friday but a bit of life shown so could be ready to move a little. DYOR, etc. GLA and take care. There's a cross-over and the signal line rate of change (was down) is approaching zero and could signal a change. About 26.70 for trend change???

[p1nkfish] 08/8/2021 15:02

See what happens over next 1-2 weeks. I am very fond of FDEV but paint me skeptical currently. Someone is doing the media rounds but price isn't as perky as I would expect and weekly MACD not as close to cross-over as I would like for a turn around. Needs a bit more time imho to de-risk anything other than a small re-entry. GLA etc. Careful acting on the media. Dyor.

[bamboo2] 08/8/2021 13:24

Price dropped below the neckline [red] to confirm the H&S pattern, but it didn't take long to find historical support approx 2100 [orange]. The neckline was then tested from below, ooer. The positive outcome of the test has seen the price rise above the 50sma and start forming the rhs of a possible INVH&S reversal. The rhs could shape up over the next few sessions between approx 2450 and 2650. An eod close above approx 2725 would confirm validity of the reversal with a tp [3150] near the ath. Price is sandwiched between the 50 and 200sma's which are are flat, but on the cusp of rising. Quite a turnaround from three weeks ago. Gla

[speedsgh] 08/8/2021 09:02

From today's Sunday Times... Frontier will stay a gaming pioneer - HTTPS://www.thetimes.co.uk/article/frontier-will-stay-a-gaming-pioneer-25jc5pwnc Back in the 1980s, two gamers struck up a friendship at university. The students, David Braben and Ian Bell, created Elite, an immersive space simulation where players roamed galaxies on a spaceship. It was revolutionary for its time, and the pair became millionaires. They eventually parted ways and Braben founded Frontier Developments in 1994, listing it on AIM in 2013. Since then, the shares have risen by more than 1,500 per cent — surging recently thanks to a gaming boom during the pandemic. It has become a multibillion-pound sector, and Frontier is at the front of the pack among British developers. Over the years, it has shifted from developing games for third parties to publishing its own, which has boosted margins. It has won big licensing deals including with Universal Studios for Jurassic World Evolution, and with Games Workshop for Warhammer. And in a world where social media is driving trends, Frontier has increasingly used influencers to advertise its games on sites such as Twitch and YouTube. Braben will no doubt be keeping a close eye on his rivals. Sumo Group, which worked on the Fast & Furious franchise, was snapped up by Tencent last month. The Chinese tech group is also an investor in Frontier, with a 9 per cent stake bought in 2017. There will be more dealmaking ahead as console-focused publishers snap up mobile app developers to expand their reach. Bigger platforms also want to secure exclusive content. For Frontier, revenue growth has tended to be erratic, depending on the date of releases in any one year. Braben, 57, apologised to customers in May after a new game, Elite Dangerous: Odyssey, had performance issues. Frontier also revealed that a new Formula One management game would be released later than expected. However, there are reasons to be optimistic. Frontier plans to release a sequel to Jurassic World Evolution this year, and it will benefit when Universal releases the film Jurassic World: Dominion next June. The first iteration of this game earned more than £70 million in its first year. Analysts have pencilled in £40 million for Frontier for its new game. When it reports at the start of next month, the company is expected to announce a 20 per cent rise in sales to £91 million for the 12 months to the end of May, at the lower end of its range. Frontier’s slightly bumpy year is reflected its shares: they rose to a high of £34.30 in January before retreating, closing on Friday at £25.95, valuing it at about £1 billion. Now may be the time to buy.