AIM stocks can be a goldmine for UK share investors. They can also carry higher risk than FTSE 100 or FTSE 250 companies. But businesses on London’s alternative market often grow rapidly and deliver stunning returns in the process.
Keywords Studios (LSE:KWS) is a share that I bought for my portfolio in spring 2021. The business provides software services to more than 50 video games studios across the globe.
And following the release of excellent results on Wednesday I’m considering increasing my stake in the AIM business.
More great results
Video games revenues rocketed during the pandemic as people entertained themselves at home. But fewer title launches and the end of lockdowns saw the industry shrink in 2022.
However, this hasn’t taken the wind out of Keywords Studios’ sails. In fact, today it raised its profits guidance for the second time in as many months on robust second-half revenues.
Organic sales rose 22% between July and December, it announced, continuing the strong momentum it enjoyed in the first half. Keywords commented that it “continued to benefit from the industry’s focus on new content creation and the increasing complexity of games, leading to strong demand for our services.”
Why Keywords Studios?
UK share investors have a number of ways to capitalise on the growing video games market. Games developers Frontier Developments and Team17 Group can also be found on London’s AIM index.
However, Keywords Studios might be a less risky way to invest in the entertainment software sector. As analyst Aarin Chiekrie at Hargreaves Lansdown commented: “Its highly diversified client base and geographical reach means it’s less exposed to the hit-or-miss risk from individual games, and to some degree insulated from changes to development cycles of new releases.”
Frontier Developments shares slumped earlier this month on poor sales of titles like F1 Manager 2022. Businesses like Keywords aren’t exposed to the same levels of competition.
A top growth stock
The video games sector is a great place to invest in my opinion. Analysts at PwC believe the industry will growth at a compound annual growth rate of 8.4% over the next few years. It’s expected to be worth a colossal $321bn by 2026.
And Keywords Studios could be a great investment in this booming industry. The firm’s revenues could suffer in 2023 as consumers cut back on discretionary spending. But with a market cap above £2bn and clients including Microsoft, Take-Two Interactive and Electronic Arts, it has the clout and the industry recognition to thrive.
Yet I don’t see these factors reflected in the company’s rock-bottom valuation. Today Keywords shares trade on a price-to-earnings growth (PEG) ratio of 0.3. Any reading below 1 indicates that a stock is undervalued.
City analysts think annual earnings growth will accelerate from 7% in 2023 to 11% next year. I expect this strong momentum to continue too, with growth likely to be boosted by further acquisitions. This is an AIM stock that I never want to sell.
Royston Wild has positions in Keywords Studios Plc. The Motley Fool UK has recommended Frontier Developments Plc, Hargreaves Lansdown Plc, Microsoft, and Take-Two Interactive Software. 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.
Motley Fool UK 2023