The video games business is evidently booming with the ‘next-gen’ consoles rolling into a market brimming with demand.

Stay-at-home gamers have buoyed the coffers across the industry through even the most challenging months of 2020.

In fact, the pandemic has driven in-game and direct-to-consumer game download sales.

At the same time, the launch of the new Sony Playstation and Microsoft Xbox have seen huge volumes of pre-order sales leaving almost zero available stock either online or in bricks-and-mortar stores.

Sure, there have been some disruptions and logistical challenges for new game development in 2020, but nothing on the scale seen in the movie-making business which has seen billions of dollars-worth of entertainment either delayed or distributed as subscription bait loss-leaders for streaming platforms.

Major game distributors – such as Electronic Arts, Ubisoft, Activision Blizzard, and TakeTwo Interaction – all reported massive spikes in users and playtime through various phases of COVID-19 lockdown, which naturally drive revenues, cash generation and earnings.

That TakeTwo recently moved to take over British game developer Codemasters for GBP735mln, an offer deemed derisory and cheap by some commentators, reflects a mode of optimism that’s in stark contrast to most other consumer-facing businesses.

READ: Codemasters boosted as TakeTwo lines up takeover

Practically an alternate universe, the sector presents investors with a promise of genuine growth, liquidity and even shareholder dividends.

In the UK alone, it is forecast to become a GBP10bn industry in the coming years and presently is said to be the fifth-largest market for games in the world.

Significantly, according to recruitment firm Robert Walters, there’s been a 20% expansion in the number of video game jobs this year.

“Although the UK may not boast the huge populations of the other countries in the gaming race, it has always remained competitive at developing technology – as well as housing some of the best gaming talent in the world,” said Tom Chambers, senior manager at Robert Walters.

A report authored by Robert Walters highlighted four key drivers of growth – the rise of mobile-based gaming, social gaming eSports and augmented reality.

There are many other specific and nuanced areas driving creativity and productivity for developers, and of course driving the increasing levels of engagement with an expanding gaming audience.

One quite simple thing can be said: ever-larger numbers of people are playing video games across an ever-larger array of gaming technologies.

Significantly, too, as gamers are becoming attached to game titles and franchises for longer the game studios are getting better at monetising their intellectual and brand properties over a more continuous or episodic game lifespan.

Downloadable game expansions, add-ons and/or endless online play is meanwhile supported by subscription and micro-transaction style revenue models.

This is a feature of the games industry that’s particularly interesting for investors following London-listed, Dublin-headquartered Keywords Studios PLC (LON:KWS).

Keywords, which today upgraded its full-year expectations for 2020, is a contractor, outsourcer and service provider to the gamer development industry.

The acquisitive group has grown massively since its GBP28mln London IPO which in the second half of 2013 coincided with the last generation console cycle (Playstation 4 and Xbox One).

Keyword’s transformation over the past seven years somewhat reflects its embedded position in an industry that, commercially, has itself transformed and matured substantially over the same period.

READ: Keywords lifts full-year guidance

Now valued at some GBP1.6bn in the market, Keywords delivers a multitude of services from more than 60 locations around the world; from art and audio production, language, localisation and increasingly, customer service functions.

Keywords on Tuesday told investors it now expects full-year adjusted profit before tax will be significantly ahead of the current market consensus.

Revenue for 2020 is expected to be in line with market expectations of EUR367mln, up from EUR326.5mln, reflecting robust demand for the group’s services despite previously stated coronavirus (COVID-19) production constraints.

Adjusted profit before tax is now expected to clock in at around EUR52mln, versus the market consensus of EUR46mln and up from EUR40.9mln in 2019.

At the time of its first-half results, in September, Keywords said it expected strong demand for its contracted services aided by new console launches, higher end-user gameplay numbers and rising demand for new game content.

Andrew Bryant, analyst at stockbroker Liberum Capital, in a note, commented: “Management have already flagged that the outlook for FY21 is very positive given the demand outlook post new console releases and our view that the group should take further share in the gaming services market.”

Liberum rates Keywords as a ‘buy’ with a 2,450p price target that implies some 13% upside to the current price of 2,156p.

Where to find video game stocks

Keywords is the largest of the London market’s video game companies, but it is not alone.

Sumo Group PLC (LON:SUMO) is also in the game services and contracting business, similar to Keywords. At 268p per share, it is valued in the market at around GBP457mln.

Bidstack Group PLC (LON:BIDS) is a small-cap advertising technology group which enables dynamic in-game advertising campaigns to be delivered to simulated in-game advertising assets. For example, via its partnership with Codemasters it is able to deploy real-world ad campaigns into track-side advertising boards on the game.

Codemasters is the Warwickshire-based developer behind the F1 game franchise and DIRT rally racing series, has a market value of GBP748.5mln (at 491p per share) albeit the TakeTwo approach pitched at GBP735mln is a factor there.

AIM-listed Team17 Group PLC (LON:TM17), known for games such as Worms and Overcooked, earlier this month announced the launch of its first game for the next-generation consoles, with Overcooked! All You Can Eat for the Xbox Series X|S and PlayStation 5. Team17 is valued at just over GBP1bn.

Frontier Developments PLC (LON:FDEV), with a market cap just shy of GBP0.95bn, is more focused on the PC market with series such as Elite Dangerous, Planet Coaster and Jurassic World Evolution. But it is poised to release its Jurassic World Evolution game on Nintendo Switch.

New York is host to most of the top-tier game developers including Electronic Arts Inc (NASDAQ:EA), which publishes a number of high profile sports franchise titles (such as FIFA, Madden NFL, NHL and UFC) along with a separate non-sports games division.

Activision Blizzard Inc (NASDAQ:ATVI) is the company behind lucrative games franchises like Call of Duty, World of Warcraft and smartphone phenomenon Candy Crush.

Codemaster’s suitor Take-Two Interactive Software (NASDAQ:TTWO) is the parent of Grand Theft Auto publisher Rockstar Games and 2K Sports (which has licences for PGA Golf, the NBA and WWE pro wrestling).

Meanwhile, Assassins Creed and Watch Dogs publisher Ubisoft (EPA:UBI) has a listing in France.

In Asia, there’s Japan’s Nintendo Co (TYO:7974) and Final Fantasy creator Square Enix Holdings (TYO:9684).

Chinese tech conglomerate Tencent (HKD:0700) is among the cornerstone shareholder in America-based Fortnite publisher EPIC Games – Disney and Sony also hold shares in the private company.

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