Keywords Studios: Buy it, while it is still affordable

Irish video game support provided Keywords Studios (LON:KWS) is on a roll. The company is growing fast through the inorganic route, resulting in tearing growth rates. And this, while maintaining its financial balance. Evidently, this shows up in fact that it is a pricey stock.

It has a 12-month trailing price-to-earnings ratio of 71.6x, which is higher than that for its entire peerset, save Learning Technologies, which provides e-learning services and technologies. But this is a better time than any other to consider Keywords Studios, since the AIM-listed company’s share price has dipped significantly since October, and has been trading at levels of around 30% lower than the average for the past 12 months.

A look at the company’s fundamentals raises the question, however, of how long this fall can continue. It is a financially robust, growth focused company in a fast developing industry. Keywords Studios saw a whole 72% increase in revenues for the first half of 2018, compared to the corresponding half of the previous year.

Its net income showed a very healthy increase, more than doubling to €7.7m. Further, the company’s guidance for the second half is also positive, suggesting that investors can continue to see strong potential for healthy returns on investments.

The gaming industry is a $138bn market, which is growing at around 13% per annum at present, giving much opportunity for expansion for players in the segment. Keywords Studios has created a space for itself in providing support services for the gaming industry like functional testing, localisation, art creation, player support and audio services.

The company has consistently been adding to its portfolio of offerings by making acquisitions. So far, Keywords Studios has made 36 acquisitions; of which eight have been made in 2018 alone. It has also mentioned that more acquisitions can be witnessed in the future.

The one question worth considering here is whether the company’s commensurate increase in debt is adequately covered. Its debt levels have certainly increased significantly, but both the debt-to-equity ratio and interest coverage ratios are in check, with the former at less than one and the latter at greater than one respectively.

Keywords Studios’ risk diversification by reducing dependence on key clients is also a positive. From around 60% revenues gained from the top five clients in 2014, the proportion is now down to close to 20%.

As a result, none of its clients now have over 10% share in revenues; which suggests that the potential loss of a single client will not significantly impact Keywords Studios operations. Further, with growing revenue witnessed across business lines, there is limited risk emanating from potential loss of business in one area.

Conclusion: Keywords Studios is a fast growing company, which is playing its cards right. Clearly, investors see its value, which is why it has a relatively high P/E. But that should not be a deterrent, especially when its price is down.