We fluffed our chance to sell this stock at a huge gain. What should we do now?

The video games company Frontier Developments soared during the pandemic but then crashed. We’ll assess its prospects now

We were unquestionably right to advise readers to buy shares in Frontier Developments, the video games company, at £11.50 in March 2020. Whether we were right to say hold on seven months later at £26.30 is more debatable.

The reason for that astonishing leap was, of course, the pandemic. As we had written in our March tip, “if the global economy grinds to a halt because of coronavirus, we might as well sit at home in self-isolation playing video games”. Frontier took full part in the craze for “working from home” stocks and tech more generally and the share price went on to reach £33 in January last year.

But like so many others in those categories the gains started to evaporate as last year wore on and – not helped by a profits warning a year ago – the shares are now back at £13.20, just 14.8pc above where we tipped them. We did at least write in our follow-up article that “readers who followed Questor’s advice in March should bank some profits”, but in hindsight a straight “sell” would have been a better call. However, on the assumption that some readers still have a stake, what should they do?

The first thing to say is that this is a well-run business with a clear strategy, good managers and a strong culture. It was run for 28 years after its foundation in 1994 by David Braben, who handed over the reins to Jonny Watts, the former chief creative officer, only in August.

Braben, a 33pc shareholder, will in his new role as president “retain oversight and involvement in strategic direction and key external relationships”, so we can take his views seriously when he describes his successor as “excellent”. Frontier has lots of cash – a good place to be when interest rates are rising – and until last week it had never made an acquisition, growing organically instead. That acquisition, moreover, was not made blind but was of a company, Canada’s Complex Games, with which Frontier had been collaborating for several years on one of its games. Analysts at Liberum, the stockbroker, described the takeover as a “strategically sensible, low-risk acquisition”.

Not only is Frontier familiar with Complex Games’ culture and people but it is taking on at a stroke its 20 developers, in a market where these skilled professionals are hard to come by. And the acquisition gives Frontier the chance to hire more thanks to Complex’s location in Canada, where “there is high-quality engineering talent”, Liberum said. The shortage of developers is “the industry’s major concern over the midterm”, it added.

Frontier describes its approach to getting the most from each of its games as “develop, launch, nurture”. It takes some of the risk out of the first step by collaborating on some games with outside developers, an approach described by Panmure Gordon, the broker, as “try before you buy”, while others are developed in-house. By “nurture” it means that it aims to prolong the life of each game long after its release by engaging with its users and by the launch of new content, both free and paid for, to enhance the game.

It likes its new launches to be in or adjacent to niches in which it already has a record of success. One example is “management” games: those that allow users to run organisations such as a zoo (Planet Zoo) or a Formula 1 team (F1 Manager). In recent years the company has picked up the pace of new launches and it expects to continue to grow sales by about 20pc a year on average. Profit growth should also be strong. Liberum has forecast sales of about £161m in 2024, compared with £114m for the year to May, and said it expected pre-tax profits in two years’ time of £23m; the figure was just £944,000 this year thanks to exceptional items but was £19.2m last year. The shares trade at 22.7 times the broker’s forecast of 58.2p earnings per share for 2024. This is not excessive for a fast-growing stock. We’ll hold on.

Update: Samsung

We made this stock our tip of the year in January 2021 but it has not worked out well and the shares at $1,129 have lost 40.8pc of their value in dollar terms. The decline of sterling cuts the loss to 30.4pc. The Allianz Technology Trust, whose then-manager, Walter Price, put us on to the company, has now sold on the basis of slowing demand for the products in which Samsung’s memory chips are used and we will, with apologies to readers, follow suit. Sell.