Games producer Devolver Digital Games, based in Texas, has had a bad week. It issued a profits warning for the year and suffered a 50 per cent crash in its share price. The concerns drove a sell-off across many PC and console video games as it raised concerns over market congestion, softening market demand and rising cost inflation.
On June 13th, Devolver released a trading update downgrading its FY 2022 EBITDA guidance by c40 percent due to the poor performance of three of its most heavily invested titles: Shadow Warrior 3, Weird West and Trek to Yomi. Devolver also cited market congestion and cost inflation as headwinds.
A report from equity analysts at investment bank Berenberg suggests that Devolver’s problems are not necessarily widespread in the Games sector despite the obvious post-Covid problems.
“This is supported by the very positive trading update that Frontier Developments (Frontier) released this week. While we acknowledge these macroeconomic concerns, we do not think that they alone should cause a company to profit warn. Indeed, we believe the companies that are able to execute on their pipeline will perform well, while these headwinds will amplify the shortcomings of those that do not execute – creating a wider-than-usual gap between the winners and losers in the sector over the next year,” states Berenberg.
The bank says that macroeconomic headwinds will eventually put pressure on consumer spending.
“Whether this results in lower demand for video games is not straightforward,” says Berenberg. “Currently, there has not been any meaningful impact on video game spend – PC and console games are selling well and mobile revenue per download is robust, while console sales have accelerated as supply has improved. This may be due to: 1) video games being a very low-cost form of entertainment; and/or 2) the emergence of games-as-a-service, subscriptions and free-2-play models being more resilient. Historically, video game sales have held up well during weaker economic periods. In our view, video games should outperform general retail and media in a recession, but they will eventually come under some pressure if consumers are squeezed significantly. By how much and when is difficult to say, but it has not happened yet.”