Gaming and software stock Playtech has jumped 54% in the last week. This comes after recent news that the company is set to be acquired by Australian gambling machine manufacturer Aristocrat Leisure for £2.7bn.
Playtech specialises in designing games and software for casinos and betting websites. Although Playtech cannot be classified as a pure game developer, it operates in a comparable space and the UK market has some excellent picks in here too. Here are two UK gaming stocks I’d invest in instead of Playtech.
UK gaming stock with excellent financials
Sumo Group (LSE:SUMO) shares surged earlier this year after a successful takeover, much like Playtech. Acquired by Chinese gaming behemoth Tencent, Sumo has been on a great run in the market, backed up by solid first-half 2021 results.
Total revenue grew an impressive 91% in H1 2021 to £50.4m (H1 2020: £26.3m). Gross profits grew 102% to £21.9m and the company amassed £5.7m net cash from operations. Also, the company has been on an acquisition spree, investing in smaller but promising game development studios from across the world. The business had a contract book totalling £540m in August 2021. This, to me, is a very encouraging sign for the rest of 2021 and beyond.
The gaming industry is valued at £300bn overall. This is extremely exciting but also brings in a lot of competition. The space looks incredible crowded at the moment and game releases are being stalled, postponed, or retracted every month. Promising releases too, seem to collapse from some bad reviews. Generating recurring revenue from a single release is a tough nut to crack for many smaller studios.
But this is where I think Sumo benefits from the £900m Tencent acquisition. The Chinese giant is behind some of the most profitable games of the decade including Fortnite, League of Legends, and PUBG Mobile. This and its strong core financials is why I think Sumo Group is an excellent UK gaming stock to buy for my portfolio.
Company with an exciting portfolio
I have been bullish on British video games developer Team17 Group (LSE: TM17) for a while now. I think it offers a stable business strategy combined with successful past releases that it can capitalise on.
As a potential shareholder, I’m impressed by the 34% increase in revenue and gross profit of £39.1m. Also, TM17’s earnings per share have shown a compounded annual growth rate (CAGR) of 58% since 2017. This is very impressive to me considering the turbulence of the industry.
TM17 shares are currently trading at 765p at a profit-to-earnings ratio of 45 times. The shares look overvalued at the moment, which is a concern. And a return of -7.1% in 2021 is disappointing and highlights the turbulence in the video game market. Also, a lot of TM17’s games are developed to foster a group playing experience. This market could diminish as offices and schools start reopening at full capacity.
But I think TM17’s multi-console approach, host of successful titles, and sustained strong performance set it up for success for the next decade. It is carving a nice niche for itself and I would consider an investment in this UK gaming stock today.
Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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