Sumo (LON:SUMO) might be one small cap to keep an eye on.

This UK-based provider of video games development and design services operates out of ten studios in the UK, India, and Canada. It is more Keywords Studios or Frontier Developments (service provider) than Team17 (IP creator), but is that about to change?

Sumo helps make games for some of the most prestigious publishers in the world, however an increasing number of its projects are Own-IP. A recent change in strategy reveals a concerted drive to become more of an owner of IP. This could help it generate better financial returns in the long term.

Today, the group lists four strategic objectives:

  • Generate royalties by developing franchise titles and downloadable content for clients;
  • Win new clients through organic expansion and selective acquisitions;
  • Develop additional services and revenue streams, possibly through acquisition; and
  • Continue to develop Own-IP opportunities.

In FY19, Sumo generated revenue of more than £16m from Own-IP. That’s more than 33% of total revenue (compared to just 10% the year before).

Sumo’s business model is changing. This could be an opportunity.

It is smaller than some of its peers, with a market cap of less than £300m, and it has yet to string together a solid track record of profitability. This is reflected in its lower StockRank, and its Quality Rank in particular:

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In November 2019, Tencent - the world’s largest video game company by revenue - acquired a near 10% shareholding in Sumo Group. This industry titan has invested in several innovative and successful game developers and publishers globally. Now it is putting its weight behind Sumo. Given Sumo’s lack of proven quality so far, I think this is an important vote of confidence.

Management is “delighted by this investment and look[s] forward to exploring game development opportunities with Tencent” - so perhaps we can expect Tencent to be a strategically valuable shareholder.

What it does

Sumo's operating businesses are Sumo Digital and Atomhawk Design.

Sumo Digital (93.6% of group revenue) is the group’s primary business.

This is one of the UK's largest independent developers of AAA-rated video games. It provides both turnkey and co-development services and has studios in Sheffield, Newcastle, Nottingham, Leamington Spa, Warrington and Pune, India. Clients include household names like Sony and Microsoft.

Sumo Digital uses leading…

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