Why Games Workshop rallied again and Keywords Studios dived

Two investor favourites suffered very different fortunes today. We explain what's going on.

Fantasy war games outmanoeuvred the video games industry today as updates from Games Workshop (LSE:GAW) and Keywords Studios (LSE:KWS) produced contrasting fortunes for investors.

Both stocks have been popular investments over the years, although Keywords has paused for breath in recent months following an epic run of share price growth. Last summer, it briefly traded above 2,000p when its forward price/earnings multiple was in the high 20s.

The AIM 100 stock was down 10% to 1,280p today after interim results showed an impact on margins from the cost of investing in staff and training to meet faster and earlier growth.

The group, which provides technical and creative services across the video games industry, continues to enjoy rapid expansion, with revenues up 39.3% to 153.2 million euros. This figure includes the contribution from four acquisitions, although on a like-for-like basis sales still rose 17.3% after considerable progress in cross-selling services to existing clients.

Source: TradingView Past performance is not a guide to future performance

Keywords deals with 23 of the top 25 most prominent games companies, including Electronic Arts (NASDAQ:EA) and Konami (LSE:KNM). Recent titles worked on include Uncharted 4: A Thief's End, Call of Duty: WWII, Mortal Combat X, Assassin's Creed Origins and Fortnite.

Acquisitions are an important part of its strategy, with Keywords today unveiling the purchase of a German language dubbing and voice over studio for 3.7 million euros. Part of the deal for Berlin-based TV Synchron will be met through the issue of Keywords shares a year after the acquisition is completed.

The company said the second half of 2019/20 had started well, albeit with organic revenues growth at a slightly slower rate than the first half. Margins are also returning towards more normal levels as the group benefits from recent investments.

More acquisitions are in the pipeline, while longer term the group looks well placed to tap into the development of games subscription and streaming platforms.

Analysts at Numis Securities described the long-term opportunity for Keywords as “exceptional”, which reflects structural industry growth, further outsourcing and a value creative M&A strategy.

They have raised their revenues and profit forecasts for 2020, adding that the company justified a price target of 1,900p. Jefferies, which is at 1,970p, said it was not convinced by the bear case that the market is becoming more competitive and less profitable.

There are no such growth worries at Games Workshop, where demand for its Warhammer fantasy miniatures continues to defy all expectations. After a long period of stagnation, revenue has increased by 117% and profit has increased by 332% over the past three years.

Source: TradingView Past performance is not a guide to future performance

Shareholders continue to be rewarded, with the stock currently trading near to a record high at 4,812p to give the company a market value of £1.5 billion. There was a rise of 3% today after a brief AGM statement said Games was trading in line with expectations.

There are many reasons for its dramatic spurt, including the simplification and reboot of the original Warhammer game as Warhammer Age of Sigma and the adoption of cheaper to operate one-man stores. The switch to plastic and resin models are also more versatile than metal.

Return on capital has increased in recent years from good to spectacular at more than 45%, while higher volumes mean the factory and stores are operating more efficiently.