MYPS - Playstudios: Reiterate Buy Rating On Positive Margin Expansion Path

2023-06-26 06:55:44 ET

Summary

• PLAYSTUDIOS' margin expansion prospects and cost-saving measures support a positive outlook on the company, with the EBITDA margin expected to reach 17.5% in FY23.
• The playAWARDS loyalty program presents significant growth opportunities, as participating users show higher spending, engagement, and retention metrics.
• Inherent risks in the gaming industry include game popularity uncertainty and potential execution challenges during reorganization efforts.

Thesis update

PLAYSTUDIOS ( MYPS ) develops and operates free-to-play casual games for mobile and social platforms. I continue to view MYPS as an attractive long as I see visible path to margin expansion (core part of my thesis) in the near-future. I reiterate my buy rating for the stock.

Margin

Management's FY23 margin guidance is very supportive of my investment thesis, with EBITDA margin expected to reach 17.5% at the midpoint, a significant increase from FY22 levels. The underlying driver for margin expansion also supported my previous argument that ad monetization would boost profitability. Indeed, the anticipated increase in EBITDA margin reflects a greater proportion of advertising-based games. Management is also effectively implementing their commitment to reducing costs by taking concrete actions. Specifically, MYPS has recently made the decision to shut down its long-standing Austin and Hong Kong studios and relocate its game development operations. The benefits of these cost savings are expected to be felt in 2H23, and then fully realized in FY24, leading to simple year-over-year increases in comparable EBITDA. Cost savings won't be seen until the 2H23, as it will take that long for affected employees to leave the company and for games associated with each studio to be moved to Tel Aviv and the supporting regions.

playAWARDS

Investment arguments for MYPS center largely on the company's loyalty program, playAWARDS. It's fantastic that management has been so forthcoming with information about the unit economics of these users. It has been reported that users who participate in playAWARDS spend six to eight times as much as those who do not, and that they also provide better metrics on engagement and retention. Based on this new data, I am optimistic about MYPS's future growth and margin expansion prospects with Brainium and Tetris . As I mentioned before, MYPS increased its player base and diversified its revenue stream by purchasing Brainium Studios and the Tetris license. I anticipate management will heavily promote its playAWARDS program in these games, with the hope that the resulting increase in engagement and retention will result in higher ad revenue. Long-term company goals, such as a growth in corporate partners outside of casinos, hotels, and cruise lines, could be aided by the additional DAUs and data on the uplift it provides to KPIs. All of these should increase the program's overall value, and continue to anchor MYPS competitive position vs peers that do not have a loyalty program set up.

Valuation

There are two key updates to my model: base EBTIDA margin (in FY23) and the multiples I expect MYPS to trade at. Previously, I expected margin to expand by 100bps a year from FY22 given my belief that management will continue to drive margin expansion initiatives. This came better than I expected when management guided to 17.5% margin in FY23. This impacted my FY25 EBITDA estimates, revised from $49 million to $63 million. Because of this margin expansion pace and trajectory, I believe MYPS should trade at premium to its historical range, to 10x forward EBITDA.

Risks

This is an inherent risk that MYPS will face for the rest of its existence. The thing about normal games (i.e., not famous franchise games) is that they are very similar to fashion styles and trends. There is no formula that guarantees that a new game will be well-liked by gamers. A couple of such blunders could devastate short-term financial performance.

MYPS has also recently undergone reorganization, with measures like layoffs and relocating developers to cheaper regions. All of these come with a high potential for failure in execution, which could dampen the margin expansion story. Finally, I think mobile gaming is more vulnerable to economic changes than PC or console gaming because of the more casual nature of its player base. If the economy continues to contract or slow down, the results may deteriorate dramatically.

Conclusion

I maintain a positive outlook on MYPS. The company's margin expansion prospects, supported by the anticipated increase in EBITDA margin and cost-saving measures, contribute to my favorable stance. Furthermore, the playAWARDS loyalty program presents a significant growth opportunity, as users participating in the program demonstrate higher spending, engagement, and retention metrics. As margin continues to improve, I believe MYPS deserves a premium valuation compared to its historical range. However, it is important to acknowledge the inherent risks associated with the gaming industry, including the uncertainty of game popularity and the potential execution challenges faced during reorganization efforts.

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