|Shares Out. (in M):||65||P/E||0||0|
|Market Cap (in $M):||1,019||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Keywords Studios Plc (KWS LN EQUITY)
Keywords Studios Plc (“KWS” LN EQUITY) is a high-quality compounder that has a long growth runway, a favorable industry structure, and trades for a reasonable valuation despite strong execution and a roadmap for continued shareholder success. Insiders own over 10% of shares outstanding and have led the company to a 50%+ total shareholder return CAGR since the company went public in 2013. I believe the company has an unusually long runway of 20%+/year EPS growth, which should lead to continued strong returns for shareholders at an entrance price of <30x fwd EPS.
Video game publishers have always been notoriously difficult work environments. Companies scale up hiring as they ramp production on a new game. These new hires are subject to a very demanding and high-pressure work environment as there is a tight game deadline. Once the game is released, a large percentage of those hired workers are terminated because they are no longer needed once the game is complete. This boom and bust hiring cycle is inefficient and leads to poor morale. Increasing game complexity in recent years has exacerbated this issue. Game creators now need a small army of highly specialized developers, artists, and project managers to create and distribute a high-profile video game worldwide. It is challenging and inefficient for studios to manage this entirely in-house due to the difficulty of identifying, hiring, and utilizing this small army of talent efficiently.
Background on Keywords Studios/ The Outsourcing Industry
Enter Keywords Studios (“KWS”). This European-based company (headquartered in Ireland, trades on the London stock exchange) is the largest outsourcer of video game production in the world. They have rolled up the industry by buying small studios all over the world that offer various aspects of video game development including art creation, engineering, customer support, audio licensing and development, localization translation, and functional testing. The company now has the in-house capabilities to develop an entire game for their clients if needed (though this has not happened yet).
The company has more than 50 studios located in 40 cities worldwide and 21 countries providing full, integrated services by combining a presence that is local to their clients in key gaming cluster with lower cost production sites across four continents. They have 6,000+ people on the payroll at peak times, provide services across 50+ languages, serve 23 out of the top 25 gaming companies measured by revenue.
The video game industry is growing at a roughly 6%-9% global rate (depending on data source—KWS). The outsourcing industry is growing a bit faster than that at about 10-11% growth. KWS has been outpacing (on an organic basis) the growth of the outsourcing industry: growing organically in the mid-teens.