PLTK - BofA takes Sell sign off Playtika as cost discipline cuts risks

Israeli videogame company Playtika ( NASDAQ: PLTK ) is up 6.3% Tuesday, outpacing a number of sector peers, after BofA upgraded the stock to Neutral as some cost discipline "de-risks" the stock even ahead of a potential recession.

The stock is more inexpensive than when BofA initiated coverage at Underperform in the summer, and more has changed, analyst Omar Dessouky said.

He points to a combination of disclosed plans for a 15% cut to the workforce (about 600 employees that should provide $50M-$70M in savings); cost discipline on Playtika's advertising expenses; and revenue estimated to drop just 3% in 2023. Those factors give Dessouky confidence that EBITDA and free cash flow estimates have "troughed."

Consistent with some expectations for a United States recession in the first half, BofA assumes a 2% drop in Playtika's paying users and a 1.2% decline in average revenue per paying user.

"Moreover, mgmt’s decision to discontinue three games demonstrates its commitment to maintain profitability at scale (i.e. strictly pursue only games that can clearly exceed $100M annual bookings) in the context of a very difficult UA [user acquisition] environment," Dessouky said.

And Playtika's actions are a "harbinger of cost cutting and portfolio rationalization" at other mobile game developers, notably Take-Two Interactive Software ( TTWO ), Electronic Arts ( EA ) and AppLovin ( APP ), he said.

He has a $9 price target on Playtika stock ( PLTK ), vs. a current $9.02 quote.

Recently, investment firm Joffre Capital confirmed it wouldn't proceed on a summer share purchase agreement with Playtika .

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