IPO - Playtika: A Compelling Valuation But Strong Downside Price Momentum

Summary

• IPO stocks have taken it on the chin this year, falling markedly against the S&P 500.
• One social/casino company features earnings growth expecatations next year and positive free cash flow.
• With an attractive valuation, there are bigger technical risks.

Looking for 2022’s biggest losers? You can find quite a few of them in IPO land. The Renaissance IPO ETF ( IPO ) has underperformed the S&P 500 by nearly 50 percentage points on the year. Many names are mired in big downtrends. One profitable recent IPO sports solid free cash flow and intriguing growth prospects in the quarters ahead. Is Playtika a buy? Let’s find out.

YTD Factor Relative Returns: IPOs Worst Of The Bunch

According to Bank of America Global Research, Playtika ( PLTK ) is a leading mobile game publisher in the US and has established itself as a dominant player in the Social Casino segment. The company has several games ranking in the Top-100 charts, including many highly ranked games in their respective categories. Playtika generates revenue primarily from sales of virtual items, with the remaining 3% of its revenue from in-game advertising. The company is headquartered in Israel with offices around the world.

The Israel-based $3.0 billion market cap Entertainment industry company within the Communication Services sector trades at a low 11.7 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal . The firm was recently upgraded by BofA from a sell as it was encouraged by cost discipline amid a tough macro environment. That came after disappointing news that Joffre said it would not embark on a 106 million share purchase. Finally, back in November, Playtika reported in-line earnings while topping revenue expectations and reiterated its outlook.

Better-than-expected economic growth would be a tailwind for PLTK as well as increased casino activity. Other upside catalysts could be via launches of new games or acquisitions and the chance that Playtika is acquired. Downside risks include a poor macro landscape in 2023, lower mobile gaming spending trends, and risks around its big shareholders Giant/Alpha Group.

On valuation, analysts at BofA see earnings having fallen slightly this year but then rallying sharply in 2023. A still-strong 12% per-share profit growth rate is expected in 2024, too. The Bloomberg consensus forecast is not as optimistic as what BofA sees. Still, both the stock’s operating and GAAP P/Es look attractive in the years ahead despite the company not paying a dividend. The EV/EBITDA multiple is low while free cash flow is high. Overall, I like the valuation .

Playtika: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate event data from Wall Street Horizon show an unconfirmed Q4 2022 earnings date of Thursday, February 23. The calendar is light aside from that.

Corporate Event Calendar

The Technical Take

While PLTK sports a good valuation considering its earnings growth outlook, I see bearish risks in the chart. Notice below that shares are stuck in a protracted downtrend that began right when the stock went public in early 2021. It’s hard to spot any signs of a reversal. There’s support at a downtrend channel line, currently near $7, but that would simply be a spot to lift shorts rather than get aggressively long.

There’s resistance at the downtrend channel line just above $9. Both the near-term 50-day moving average and long-term 200-day moving average are negatively sloped. Keep your eye on the RSI at the top of the chart – if it breaks out above 60 along with price rising above about $11, that could signal a possible bullish reversal.

PLTK: Don't Fight The Trend

The Bottom Line

Overall, I like the valuation and growth story on PLTK, but the chart is just so bearish. I am a hold for now, but will hopefully revisit this name later to see if the chart looks more constructive.

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