UK growth stocks aren’t having a great time right now with both inflation on the rise and the pandemic dragging on. But despite what the downward trajectory indicates, many of these businesses seem to be doing rather well.
With that in mind, I’ve found one UK stock already in my portfolio that could have explosive growth potential over the long term. Let’s explore.
A behind-the-scenes leader in video game development
Many top game development studios like Microsoft, Activision Blizzard, and Electronic Arts steal the headlines when a new game hits the shelves. But behind most AAA titles lies another UK growth stock called Keywords Studios (LSE:KWS).
This business provides support services to the industry, assisting throughout the entire game development process. That includes content creation, marketing, programming, audio FX, quality assurance, and player testing. What started out as a small team based in Ireland has expanded to a global enterprise, serving 23 of the top 25 game development studios worldwide.
As budgets for new games get bigger, the need for the expertise provided by Keywords Studios has never been higher. The latest trading update makes that perfectly clear, with 2021 full-year revenue expected to come in at €505m (£420m) – a 35% year-on-year growth.
That’s pretty consistent with results delivered over the last five years, even during the height of the pandemic. So I’m not surprised to see the UK growth stock climb over 330% in the last half-decade. And if it can continue to cater to the rapidly growing video game industry, I believe the stock can climb even higher over the next five years as well.
Taking a step back
A recent report by Market Research Future forecasts the video games industry will grow by 14.5% annually until 2026. That’s obviously an exciting opportunity for this UK stock. However, there are some notable risks to consider.
Game development is hard. And due to tighter deadlines along with increased expectations from gamers, the pressure for finding top-notch talent is paramount. To date, Keywords Studios appears to have been able to deliver. But should the quality of its services start to falter, or a competitor is capable of providing a better service, it could begin to eat into its market dominance.
Another potential concern is management’s growth strategy. At its core, it’s reliant on acquiring smaller service-focused studios and integrating them into the company’s talent pool. But acquisitions can be risky. Even the most promising takeover target can later turn out to be an expensive nightmare. Perhaps the quality was oversold, or the work cultures don’t blend.
Regardless, if the business makes a series of bad acquisitions, it could damage its reputation and compromise the balance sheet. Needless to say, that would likely send the UK growth stock plummeting.
A UK growth stock to buy?
The risks surrounding this business are concerning. However, they appear to be mainly within the company’s control. And, so far, management seems to be fairly disciplined in deploying its growth strategy. Therefore, personally, I think the risks match the potentially explosive reward.
So I’m definitely considering buying some more shares this year.
Zaven Boyrazian owns Keywords Studios. The Motley Fool UK has recommended Keywords Studios. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
