The video game sector has seen significant growth over the past couple of years. Leading companies such as Ubisoft, Electronic Arts and Take Two have all seen their share prices more than triple in the past few years and with the video game market continuing to grow and other related markets such as virtual reality still relatively untapped, there is no doubt in my mind that these companies will continue to grow for the foreseeable future.
Sumo Group PLC (LON: SUMO), in comparison to the 3 behemoths mentioned earlier, was started in 2003 and only became a public company only a few months ago – in Dec 2017. The company provides video game development services (e.g art development, etc) to gaming publishers and has close relationships with established publishers such as Microsoft, Sony and Sega . The company now has a market cap of £163 million, with the current share price being slightly higher that the IPO share price. The company currently has game development studios in Vancouver, Sheffield, Nottingham, Newcastle and India.
In addition to the provision of contracted game development services, the company also produced their first maiden AAA title ‘Snake Pass’ last year. The IPO prospectus indicated that Snake Pass was released in March 2017, and as at Nov 2017, 170,000 units were sold, a return on investment of 83%. Although development of new AAA titles will be a part of the strategy, the main model will continue to focus on generating contracted development fees to minimize risk and capitalize on the sector’s growth.
On the financial side, the IPO prospectus indicated that HY 2017 resulted in £14 mln in revenues, with an operating profit of £431 mln and EBITDA of £3.4m (yearly runrate of 28 mln over the year, EBITDA of ~£7m)
The next update for the company is slated for next week – April 23rd. This update should give further clarity on the current trajectory of the company; It will be very interesting to see what sort of financial numbers are published in the update.
The company has already given preliminary guidance that it expects results to be at least in line with management expectations and that the IPO was used to repay bank and shareholder debt. Management has also stated that the company now has significant positive cash balances. However, since the IPO, the company has acquired CCP Games’ Newcastle studio (renamed to SUMO Digital). Although the company stated that nominal cash was used in the acquisition, it will be interesting to have a view on the current cash balances of the company.
It must be remembered that the video game sector can be unpredictable – many video games do not sell well and studios can easily go out of business. Nevertheless, there is also the possibility that a video game can be a runaway success, and such success can result in seriously high valuations for companies who own the successful franchises (e.g Candy Crush & King Digital that was acquired for $5 billion)
Lastly, on the institutional investor front, it is clear that the company has institutional investors interested, with LionTrust Investment Partners taking an interest in February and Blackrock Inc increasing their interest in March. This is definitely a good sign for new investors – the current share price appears to be a decent entry point for the individual investor.
As always though, please do your own research before buying/selling this share; the opinions above are only my personal views and should not be considered as advice.
