How to sleuth for a data-driven edge in gaming companies

I like simple rules. But I especially like a quantifiable edge. The StockRanks give me that, and I’ve happily invested with them for a decade. When you know your odds, it makes decision making easy. If I buy ten 90+ ranked shares, six have on average been winners, and the winners gain more than the losers lose. It varies year to year, but the impact compounds wonderfully through time.

But I know private investors, and I know myself. 10% per year isn’t enough. We want more. We want 20%. We want 50%. We want multibaggers. But herein lies a problem. In reaching for returns, we step into more speculative territory. We get drawn into late-stage narratives. We start to lose our edge.

Now I’ve learnt through a lot of pain, that narrative-based investing isn’t good for me. But statistics, I know I can back. And occasionally, you can find a statistical edge in unlikely data sources. If you can match an edge with a story - that’s where the really good returns lie.

This year, I’ve found overlooked anomalies in a pair of UK gaming stocks - Trufin and Frontier Developments. While the early, easy gains may already be made, I want to share the process I’ve used to gain a small edge, as readers may be able to learn from it.

A conversation with Mark Simpson reminded me of his excellent piece, Sleuthing Your Way to an Informational Edge. He makes the case for using Google Trends as a research tool. This has now become one of my favourite sources of “weird data alpha” - particularly in small caps. What follows is how these sources have helped build conviction in two discretionary positions this year.

Case 1: Balatro drives Trufin gains

Flying back from Australia at Christmas, I noticed my eldest son, now 21, wasn’t watching movies. He was glued to a game on his iPhone. He introduced me to Balatro. While killing time in Dubai airport, I downloaded it… and promptly played for eight straight hours until my eyes nearly bled. It’s hard to describe - a mashup of poker, deck-building games and trippy psychedelia. Try it, and you’ll be hooked.

A few weeks later, I was analysing how “significantly ahead of expectations” trading statements drive future returns. Among January’s positive announcements, one name stood out: “Trufin”. I’d never heard of it. Then I read the RNS. I couldn’t believe my eyes. They were the company that owned Balatro.

A quick look at the App Store showed Balatro at #1. It had just scooped multiple Apple end-of-year awards. Trufin explicitly said the game was powering their profits. Sure, it was “just one game,” but what a game.

The investor community tends to read RNSs. They rarely buy the product. Many gave up gaming in their 20s. But here was a game I’d been personally addicted to - selling like hotcakes - and driving outsized profits at a tiny UK small cap.

I checked the broker notes. They assumed Balatro’s impact would fall precipitously. But a glance at Google Search Trends showed the exact opposite.

The number of searches for Balatro had rocketed. Sales weren’t declining. Trufin had already announced “significantly ahead” no less than three times in a row - November 18th, December 5th, and January 6th. It’s March results were impressive, but the brokerage community was still discounting a rapid decline in sales.

But March and April search numbers were high, and Balatro remained #1 in the App Store. You can download the data from Google Trends and make revenue assumptions - it was clear in March, that the revenues would continue into FY 2025 at the same run rate. Trufin was likely to announce “significantly ahead” again.

The stock is up 40% since after another two “materially ahead” announcements. Yes the Balatro search numbers are declining and it’s now dipped to #4 in the App Store charts - but the numbers are still far higher than the average all through 2024 - and there’s a non-zero chance this indie hit is becoming a long-term gaming fixture, like Minecraft which sits at #2.

Case 2: Frontier Developments goes all Jurassic

I’m largely a Value/Momentum investor, and nothing delights me more than seeing a “bowl”. A multi-year long chart decline followed by a sharp share price upturn, rising profits, and breakout news. Even better if the StockRank is 95+. Frontier Developments checked every box. They were a huge NAPS winner in 2020, and they created Elite - a game I loved as a kid.

After a rough patch with F1 Manager, the share price tanked, but Frontier restructured to focus on CMS (creative management simulation) games. Essentially, gamers can addictively build Jurassic Parks, Zoos, or Theme parks across their core titles.

But so much was riding on one big launch this year. Jurassic World Evolution 3 (JWE3). JWE1 was a breakout hit in 2018. JWE2 performed well. But could they do it again?

The game launched on October 21st. Reviews were positive. It shot straight to the top of Steam. That de-risked investment - but could it meaningfully move the needle for the business?

Well that’s where some triangulation could help.

Firstly - Metacritic Reviews. Metacritic is a review aggregation website - and JWE3 is rated higher at 81 than both JWE2 and JWE1 by critics, and has a “Universal Acclaim” rating of 9.0 for its User Score - far higher than either. 

Secondly - Google Search Trends. JWE3 is tracking 10% above in search volume than JWE2 in the UK and matching JWE2 globally. You can download the data and compare the launch dates in a Google Sheet. 

Thirdly - SteamDBInfo. This seems a bit obscure, but it’s gold. This is an actual database tracking real user game usage on the Steam platform. JWE3 is tracking at least 10% higher in terms of real user usage when the charts are aligned to release dates.

It was clear, even after a week that the game was performing as well or even better than its previous release, which was a big revenue driver for the business.

But the brokers have been overly cautious. This note from Zeus from the month before the release is telling about how low expectations have been.

It came as little surprise that Frontier Developments rushed out a bullish anouncement - and an earnings upgrade cycle appears likely (even if a lot still depends on a good holiday trading period). 

At just over two weeks after release, base game sales have now exceeded 500,000 units, with higher revenue than was achieved by Jurassic World Evolution 2 (Nov'21) in an equivalent period.

Conclusion

Fundamentally, I believe in rules-based investing to counter all kinds of personal biases. But this year, thanks to our research into “ahead of expectations” announcements, I’ve been willing to take selective, higher conviction investments on the discretionary side.

There's extra alpha in small caps if you look beyond the usual data sources. High StockRanks set the base. Positive trading statements can add momentum. But an additional edge can come from sleuthing for signals the market hasn’t priced in.  

The gaming sector is perfect for this as there are several sources of alternative data. Google Trends. App Store charts. SteamDB usage. Metacritic comparisons. Niche data sources that reveal what’s actually happening before brokers update their numbers.  There are quite a number of small-cap gaming companies listed on both the UK and international markets to which this can be applied.

To be clear, this is about a research process, it is not a set of share recommendations. These kinds of small caps have a heavy dependence on individual titles. You have to watch the data like a hawk. When the numbers turn… it’s far better to sell before a profit warning than after.  Caveat emptor!

(The author currently holds position in Trufin and Frontier Developments).