Alta Fox Opportunities Fund - Keywords Studios PLC

Summary

• KWS was the biggest loser in the portfolio in Q3.
• The stock declined because of Q3 results, which were deemed disappointing by the market.
• We remain long as I think the company is well positioned for secular video game growth, has a long history of creating value through both organic and inorganic growth, and is selling close to a 3-year trough multiple on forward earnings.

The following segment was excerpted from this fund letter.

Keywords Studios PLC (OTC:KYYWF) (KWS)

KWS was the biggest loser in the portfolio in Q3. I will spare the full thesis rehash since I discussed it in the last letter, but the stock declined because of Q3 results, which were deemed disappointing by the market. The company grew revenue 17% organically, but margins declined as the company had to invest heavily in temporary space, pay overtime for employees, and boost recruiting efforts to keep pace with demand. The disappointing margins increased conviction for bears who believe that this company is no more than an outsourced labor company.

I too was surprised by the magnitude of the margin decline, but believe the share price has overreacted. While the company does have elements of an outsourced IT player, it also has very valuable relationships with 23 of the top 25 gaming companies in the world and serves an important and growing function for them. KWS also has a history of value creation by rolling up smaller independent studios that benefit from KWS's centralized sales and support functions. We remain long as I think the company is well positioned for secular video game growth, has a long history of creating value through both organic and inorganic growth, and is selling close to a 3-year trough multiple on forward earnings.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.