Frontier Developments PLC-FDEV.L
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Disclaimer: This newsletter is not financial advice this is for educational purposes only so please DON’T take this newsletter as a buy or sell signal.
Update:
On 18/09/2023 I sold my position in Frontier Development for a -16% loss. I sold Frontier Development because I didn’t like the risk/reward anymore as management kept disappointing me by failing to execute their plan, releasing poor quality games that wouldn’t generate enough sales and also poor capital allocation. when it comes to investing when the story changes you also have to change and that is what I did.
Frontier Developments Fundamentals:
Below is a checklist I normally use in my process when I look at the fundamental health of a company. If the company meets my criteria it will be colour-coded in green and if the company fails to meet my criteria it will be colour-coded in red which means I need to investigate further and ask myself why this is the case.
As you can see below there is 1 red box and I am going to explain it:
Shares Outstanding-When analysing a company I ideally want their shares outstanding to be the same or to decrease over time. As you can see, Frontier shares outstanding have gone up by 0.7% in the last 5 years which is not something I am worried about as this is minor dilution.
Business Overview:
Founded in 1994 by David Braden, Frontier is a British video game developer based in Cambridge, England. Frontier is known for developing games such as Planet Coaster, Planet Zoo and David Braben’s Elite Dangerous franchise. Frontier has many other games operating under its umbrella such as Dog’s Life, Thrillville and Roller Coaster Tycoon 3. The company also made games for The Wallace And Gromit Franchise where they released Wallace And Gromit in Project Zoo, and a tie-in game for Wallace And Gromit: The Curse Of The Were-Rabbit. In 2008, Frontier released LostWinds, a launch title for Nintendo's WiiWare platform. The game received good reviews where it scored 81% on Metacritic. Due to LostWind’s success, Frontier followed up with a sequel in 2009 called Lost Winds: Winter Of The Melodias, which scored 86% on Metacritic. In 2010, Frontier developed Kinectimals for Microsoft's Kinect controller on the Xbox 360. In 2013, Frontier released Xbox One and Xbox 360 exclusive Zoo Tycoon, published by Microsoft Studios, and launched Backers Alpha for Elite: Dangerous in December. In 2015 the company released Screamride, a theme park construction and management simulation game for the Xbox 360 and Xbox One. Frontier has had massive success with their rollercoaster simulator games where Planet Coaster a game similar to Roller Coaster Tycoon is their second most successful franchise after their Elite series.
Business Segments:
Frontier Developments-This is Frontier’s main business segment where their team of experts will develop games across PC and Console platforms using their in-house Cobra development tools. Since 2013 Frontier now publishes all its games themselves and each game has achieved both commercial and critical success across the board since their release. Below is a list of games that Frontier’s main business segment publishes:
F1 Manager 2022-This is the official racing management/simulation game developed and published by Frontier. F1 Manager 2022 was released on PlayStation 4, PlayStation 5, Windows, Xbox One And Xbox Series X/S on 30th August 2022. F1 Manager 2022 received favourable reviews for Windows and Xbox Series X/S according to review aggregator Metacritic. The PlayStation 5 received mixed or average reviews. F1 Manager 2022 was the fourth best-selling retail game in the United Kingdom in its week of release but still wasn’t enough as the game sold below Frontier's expectations(selling around 600,000 units by January 2023). Despite the game's underperformance, Frontier reiterated its commitment to the franchise, describing the title as "a good first game in an important new annual franchise."
F1 Manager 2022
Jurassic World Evolution-Jurassic World Evolution is a construction and management simulation video game developed and published by Frontier. Jurassic World Evolution is based on the 2015 film Jurassic World. The game was released in June 2018, for Microsoft Windows, PlayStation 4 and Xbox One. A Nintendo Switch version of the game was released in November 2020. The Jurassic Word game was created by a development team of approximately 100 people with a budget of around £8 million. Its development began in 2016 after NBC Universal approached Frontier about creating a game to accompany the theatrical release of Jurassic World: Fallen Kingdom. To do this, Frontier staff inspected different dinosaur models and reference materials sent by Universal, watched the Jurassic Park films, and read the novels and fan theories. The team consulted palaeontologist Jack Horner when they designed the dinosaurs. Jeff Goldblum, Bryce Dallas Howard and BD Wong reprised their roles from the Jurassic Park film series, voicing remarks to players and contributing to the game narrative. After announcing the game at Gamescom 2017, the game received a generally mixed critical reception. Critics praised its dinosaur designs and graphics, but the game contracts, simulation and management gameplay were less well received. The game tutorial and learning curve were also criticised. Seven months after its initial release, the game had sold two million copies through digital and physical sales, making it the most successful game launched by Frontier. The game was supported with free updates and downloadable content(DLC). As of March 2020, the game had sold three million copies. A sequel, Jurassic World Evolution 2, was released on November 9, 2021.
Jurassic World Evolution 2-Jurassic World Evolution 2 is a construction and management simulation video game developed and published by Frontier. This game is a sequel to Jurassic World Evolution and is set after Jurassic World: Fallen Kingdom. The game was released for Microsoft Windows, PlayStation 4, PlayStation 5, Xbox One and Xbox X Series on November 2021. The game received generally positive reviews from critics, who deemed it an improvement over its predecessor. Early sales on the PC were lower than expected, as the game was released during the same week as several other high-profile PC games. The home console versions sold as expected, and the game had approximately 500,000 players across all platforms within two weeks of its release.
Planet Coaster-Planet Coaster is a construction and management simulation video game developed and published by Frontier for Windows. It was released worldwide on November 2016. A version for PlayStation 4, Xbox One and Xbox Series X/S known as Planet Coaster: Console Edition, was released worldwide on 10th November 2020. The PlayStation 5 version was released in North America and Australia on 12th November 2020 and in Europe on 19th November 2020. A MacOS version, developed by Aspyr, was later released on 17th November 2020 on both Steam and Mac App Store. Upon release, the game was met with praise when Matt Wales of Eurogamer recommended the game, concluding that the game is "the finest simulator yet" Meanwhile, Ben Reeves of Game Informer praised the game for its creative mode but criticised the game career mode, referring to it as "boring" and "tedious". After all the reviews the game topped Steam’s top sellers charts and Planet Coaster ended up selling over 400,000 copies in the first month of its release. In July 2018, a leak from Valve API revealed that over 1.68 million Steam users owned Planet Coaster.
Elite Dangerous-Elite Dangerous is a space flight simulation game developed and published by Frontier. The player takes the role of a pilot of a spaceship and explores a realistic 1:1 scale, open-world representation of the Milky Way. The game is the first in the series to attempt massive multiplayer gameplay, with players' actions affecting the narrative of the game. Elite Dangerous was released on Windows in December 2014, with the MacOS version later released in May 2015. A "preview" version of the game for Xbox One was later released via the Xbox Game Preview Program in June 2015 during Microsoft's briefing at the Electronic Entertainment Expo 2015 and was fully released in October 2015, while a PlayStation 4 version was released in June 2017. By the end of April 2015, Elite Dangerous had sold over 500,000 copies, with Frontier expected to generate £22 million from sales. As of January 2019, cumulative sales of Elite Dangerous exceeded 4.3 million franchise units, composed of 3 million base game units and 1.3 million Horizons expansion units. In April 2020 the sales of Elite Dangerous base game units had passed 3.5 million. During an interview published on October 2020, Frontier CFO Alex Bevis announced that Elite Dangerous had generated more than £100 million in revenue. Elite Dangerous received positive reviews from critics. Dan Whitehead of Eurogamer gave the game 8/10 and considered it to be "probably the most immersive and compelling recreation of deep space ever seen in gaming". On November 2014 Frontier announced the removal of their offline mode. The game was met with several complaints from customers, with some saying they had bought the game on the understanding that it would feature offline play. Frontier offered refunds to customers who had pre-ordered the game without playing it and said that those who had already played the game, in alpha or beta form, would not be eligible for refunds. Later, David Braben, speaking for the company, announced that refunds would be judged on a case-by-case basis.
Elite Dangerous
Frontier Foundry-Frontier Foundry is Frontier’s new division for third-party publishing. Frontier has always been driven by a singular passion to make memorable games that create legacies and break boundaries. Now, with their dedicated games label Frontier Foundry, they are helping others achieve the same goal. Below is a list of games that Frontier aims to publish on behalf of other gaming companies:
RollerCoaster Tycoon 3-RollerCoaster Tycoon 3 is a construction and management simulation video game. It is the third instalment in the RollerCoaster Tycoon series. RollerCoaster Tycoon 3 places players are in charge of managing amusement parks where rides can be built or demolished, terrain and scenery can be adjusted, and prices can be controlled to keep visitors happy.
Rollercoaster Tycoon 3 received mostly positive reviews. The game has an average rating of 81/100 at Metacritic and 84% at GameRanking. Publications such as GameSpot and Computer Gaming World were overall positive about the game citing its many new features however, fans of the original and the second game in the series tended to be more critical. Several other criticisms stemmed from bugs and technical issues such as the game crashing, the camera freezing, staff getting stuck on railings, low framerates and graphical glitches mainly caused when adjusting the landscape. On the week of November 7th 2004, RollerCoaster Tycoon 3 was the second best-selling PC game on Amazon within the next week, the game became the best-selling PC game on Amazon. According to The NPD Group, RollerCoaster Tycoon 3 was the ninth-best-selling computer game of 2004. It claimed fifth place on NPD's annual chart the following year. The game also received a "Silver" sales award from the Entertainment And Leisure Software Publishers Association indicating sales of at least 100,000 copies in the United Kingdom. In June 2015, David Braben reported that the game had sold more than 10 million copies.
Warhammer 40,000:Chaos Gate Daemonhunters-Warhammer 40,000:Chaos Gate Daemonhunters is a video game set in the gothic science fiction backdrop of the Games Workshop game system Warhammer 40,000. In it the player commands a squad of Grey Knights in a fight against the forces of Nurgle who are attempting to release a plague on the galaxy called The Bloom. This game is a reboot of the 1998 game Warhammer 40,000: Chaos Gate and was released on 5 May 2022. The game was developed by Canadian studio Complex Games and was published by Frontier Foundry. Warhammer 40,000-Chaos Gate Daemonhunters received "generally favourable" reviews, according to review aggregator Metacritic where it scored 81/100 amongst critics. Due to the success of the game Frontier ended up acquiring Complex Game for £8.3 million.
The Great War: Western Front-The Great War: Western Front is a real-time strategy video game based on the First World War. Developed by Petroglyph Games and published by Frontier Foundry, the game was released in March 2023 for Windows PC. Players can choose to play as either the central powers or the allied powers, with both having unique gameplay features and abilities. In the real-time strategy segments of the game, players can spend gold and supplies to construct an intricate network of trenches, machine gun nests, artillery batteries, and observation balloons in the set-up phase of each combat engagement. The Great War: Western Front received mixed or average reviews, according to the review aggregator Metacritic where it scored 73% amongst critics. Rock, Paper, Shotgun felt the game captured the atmosphere of the First World War but criticised the user interface as clunky and difficult to use, leading to strategic missteps.
Management
When looking at management I like to judge the CEO in several different ways such as experience, capital allocation skills and Incentives. In this section, I will cover whether management incentives are aligned with shareholders.
Experience-Jonathan Watts is the CEO at Frontier Developments. Jonathan Watts joined Frontier Developments in November 1998 from Sensible Software and throughout his career has been involved in all aspects of the creation of 23 published games such as Sensible Soccer, Cannon Fodder, Roller Coaster Tycoon 3, Kinectimals, LostWinds, Kinect Disneyland Adventures and Kinect Star Wars. Jonathan Watts also has a degree in Zoology and Computer Science.
Below is an image illustrating the current experience of Frontier’s board members.
Capital Allocation-When it comes to judging management I think capital allocation skill is very important because I want management to create shareholder value and not destroy it. So far Frontier’s capital allocation has been spot on because they are giving value back to shareholders via strategic acquisitions and organic reinvestment back into the business. Frontier strongly believes they are a growth company that can generate shareholders better return on their investments than paying a dividend.
Frontier Development currently DOES NOT pay a dividend. All their cash flow is currently being used as reinvestment back into the business for future growth.
Incentive-This is important because if the current board is actively purchasing stock of their own business this is a positive indicator that shows that management believes the stock is undervalued and they believe in the long-term prospect of the company.
As you can see below we have 3 people selling and 4 people buying. Jonathan Watts(CEO), Alexander Bevis(CFO), David Wilton(Independent Non-Executive Chairman) and Ilse Howling(Non-Executive Director) are the only insiders buying Frontier Development shares. As for selling, James Dixon(COO), David Gammon and Charles William Cotton(Independent Non-Executive Director) are the only insiders selling but I am not going to put too much weight into this because there are so many reasons why someone might sell their stock.
Bull And Bear Case:
Bull Case
Bull Case-The first bull case is longevity. One criticism that a lot of gaming firms get is they make a game, release it, and the game gets forgotten after a year. To combat this Frontier have a launch and nurture strategy. Frontier plays to its strengths by creating deep, immersive and high-fidelity games using a strategic mix of in-house and licensed IP that builds on its proven capabilities and unique track record. Post-launch, Frontier nurtures its games for many years through community engagement and additional content. You can see how effective this strategy is because below is a graph showing the lifecycle of their famous games and how much revenue and cash flow they generate over time. As the years go by Frontier games generate more in revenue and cash flow.
Bull Case- The second bull case is the ownership structure. Currently, the founder owns 33% of the company. This is usually a positive indicator because when the owner still has a large percentage of his net worth in the company he would want the company to do well. Secondly, Tencent has a 9% stake in Frontier due to its potential and track record of releasing high-quality games that last a very long time. For those who aren’t familiar with Tencent’s investment track record, they have a history of helping companies with limited resources do well because Tencent can drive traffic from their WeChat platform towards that company service. As of 2022, Tencent WeChat platform has 1.3 Billion monthly active users.
Bear Case
Bear Case-The first Bear care is competition. The gaming industry is highly competitive and Frontier is facing that right now where they launched Frontier Foundry(a third-party publisher)but they had to pause it due to competition and not getting a good return on their capital. Management is currently monitoring this situation. The assessment is expected to be completed by 31st May 2023.
Bear Case-The second bear case is a criticism of management. Even though management has owned up to their rookie mistakes I still think it is important to highlight this issue for those who aren’t aware. On two occasions Frontier has released games during competitive periods(towards the backend of the year). Frontier released their F1 management game and Jurassic Park 2 game during a highly competitive period and as a result of this they had fewer sales than they would have liked which is one reason the stock is down in the first place because they had to revise their guidance twice. For me, this is poor by management because they have deep gaming knowledge and everyone in the gaming world knows towards Christmas it gets competitive.
Valuation:
In this section, I am going to talk about valuation. Using some basic metrics I am going to compare Frontier against some of its industry rivals and see if the company is cheap relative to its peers then I will value Frontier using a discounted cash flow model to come up with a price I am willing to pay based on expected growth rate and my desired return of 15%.
As shown below when comparing Frontier against its peers it scores 3/5 whilst TinyBuilds also scores 3/5. Both are high-quality companies but Frontier steals this one based on its track record.
As you can see based on my conservative assumption, Frontier is looking to grow mid-single digits so I went conservative and assumed a 4% growth in the first 1-3 years then the growth will slow down to 1% in 4-6 years out. In my assumption, I also went with an exit multiple of 10x earnings which is below the historical average that Frontier has traded at. Based on my assumption I have come to a buy price of £5.85p which means right now Frontier has significant upside potential if you compare it against the stock price of £5.01p.
Thanks for reading my newsletter on Frontier Developments. Disclaimer this newsletter is not financial advice this is for educational purposes only so please DON’T take this as a buy or sell signal.
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If they can start acquiring some of the IP they're publishing and transition to being a 1st/2nd party publisher, Frontier Foundry is likely to become a more profitable segment.
Excellent write up Wes! Appreciate your insight and hard work putting this together. It’s definitely a stock people should put on their watchlist 👍🏼