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Synthetic intelligence (or AI) has been one of many investing buzzwords of 2023. It’s supercharged the share costs of blue-chip tech shares like Nvidia and Tesla, however there have additionally been casualties. Key phrases Studios (LSE:KWS) is one firm whose share value has dropped off a cliff.
At £15.10 per share, the corporate — which supplies technical and inventive assist to the video video games trade — has sunk 44% in worth since 1 January.
Key phrases supplies providers to among the world’s largest video games builders. It provides visible and audio content material, checks for software program glitches, supplies participant assist, and interprets and localises merchandise for various markets.
The massive query dealing with the corporate is: why would a video games studios pay Key phrases to do any of this, when generative AI may do it way more cheaply and shortly?
There’s extra to this than meets the attention, nonetheless.
Nonetheless impressing
Regardless of a current weakening in client spending, demand for video video games has remained strong. This has in flip continued to energy demand for Key phrases Studios’ providers.
Revenues on the agency rose 19.4% within the six months to June, to €383.5m, newest financials confirmed. This was up 10.4% on an natural foundation, a outcome that pushed adjusted earnings to €77.3m, a ten.3% year-on-year enchancment.
I first purchased Key phrases shares to make cash from the booming video games trade. It’s a market through which it has a confirmed observe report of success (gross sales have greater than doubled since 2019). And it’s one which is tipped for additional sustained progress, because the graph beneath reveals.
And with a market share in mid-single-digit percentages, the agency has loads of room for progress. So ought to I improve my holdings within the enterprise?
The AI menace
As an investor I have to weigh up the menace posed by generative AI to Key phrases Studios versus the chance of accelerating leisure software program demand.
On the plus aspect, the corporate is investing closely in AI itself to take advantage of this tech revolution. And it’s so far making a profitable foray into this new frontier. The agency has three divisions that use machine pondering to check software program, localise content material, and supply participant assist.
Nevertheless, it’s removed from sure that its clients will nonetheless wish to use Key phrases’ providers as a substitute of doing these duties themselves. What’s extra, even when volumes maintain up, the associated fee to serve that Key phrases enjoys on sure tasks could steadily decline as expertise improves effectivity.
The decision
So to reply my earlier query: is the Key phrases Studios share value too low cost to overlook?
Metropolis analysts reckon earnings will rise 1% in 2023, leaving the corporate buying and selling on a price-to-earnings (P/E) ratio of 15.3 instances. That is far beneath the corporate’s long-term historic common near 30 instances. However after all it hasn’t confronted a problem fairly like that posed by AI in years passed by.
As machine studying and pondering turns into extra superior, huge bother might be coming down the road at Key phrases. However however, enterprise volumes may rise as AI makes video games extra subtle and raises improvement necessities in different areas. It’s simply too early to say.
At this level, I’m blissful to cling to my Key phrases shares. However I gained’t be including to my place simply but, even at present costs.
