PLTK - Playtika Hunkers Down As New Title Marketing Idles

2023-04-19 12:12:57 ET

Summary

• Playtika Holding Corp. went public in January 2021, raising $1.9 billion in gross IPO proceeds.
• The company publishes mobile video game titles worldwide.
• Playtika Holding Corp. has paused new title online marketing due to lack of ROI, so the firm is in a holding pattern.
• Until management can reignite revenue growth at a reasonable price, I'm Neutral [Hold] on Playtika Holding Corp.

A Quick Take On Playtika

Playtika Holding Corp. (PLTK) went public in January 2021, raising approximately $1.88 billion in gross proceeds in an IPO that priced at $27.00 per share.

The firm offers mobile games on social networks and mobile platforms worldwide.

PLTK appears to be in a holding pattern of investing in its successful titles while cutting back on its new title marketing and reducing corporate expenses as much as possible.

Until management can cost-effectively reignite revenue growth, I'm Neutral [Hold] on Playtika Holding Corp.

Playtika Overview

Herzliya Pituach, Israel-based Playtika Holding Corp. was founded to acquire and design free-to-play mobile games with numerous titles in the top 100 highest-grossing category.

Management is headed by co-founder, Chairman and CEO Robert Antokol, who has an electrical engineering background.

The company's game offerings include:

• Slotomania

• Caesars Slots

• Solitaire Grand Harvest

• Bingo Blitz

• June's Journey

• World Series of Poker

• House of Fun.

PLTK primarily markets its games via online app stores and digital advertising, including on YouTube and social networking websites like Facebook.

The firm has expanded its portfolio primarily through game acquisitions, and with the development talent it now has, is developing games that are similar in genre to its existing portfolio of games.

Playtika's Market & Competition

According to a 2022 market research report by Skyquest, the global market for mobile gaming was an estimated $101 billion in 2021 and is forecast to reach $139 billion by the end of 2030.

This represented a CAGR of 17.1% from 2023 to 2030.

Growth is expected to come from a combination of the proliferation of 5G networks, more advanced smartphones and the increasing sophistication of consumers and mobile game developers.

Also, there will be growing popularity of Esports, social gaming and cloud-based gaming options for players.

Major competitive or other industry participants include:

• Tencent
• Activision Blizzard
• Electronic Arts
• Take-Two
• Ninenedo
• Ubisoft
• Product Madness/Big Fish
• Others.

Playtika's Recent Financial Trends

• Total revenue by quarter has fallen recently:

• Gross profit margin by quarter has dropped slightly in the most recent quarter:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended lower in recent quarters:

• Operating income by quarter has fluctuated materially:

• Operating leverage by quarter has turned negative in recent quarters:

• Earnings per share (Diluted) have been volatile in 2022, as shown in the chart below:

(All data in the above charts is GAAP.)

In the past 12 months, Playtika Holding Corp.'s stock price has fallen 37.5% vs. that of the iShares Expanded Technology-Software ETF's ( IGV ) drop of 6.8%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $768.7 million in cash and equivalents and $2.4 billion in total debt, of which $12.4 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was an impressive $425.4 million, of which capital expenditures accounted for $68.3 million. The company paid $123.5 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Playtika

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm's projected growth and earnings:

Assuming generous DCF parameters, the firm's shares would be valued at approximately $11.12 versus the current price of $11.45, indicating they are potentially currently fully valued, with the given earnings, growth, and discount rate assumptions of the DCF.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

PLTK's most recent GAAP Rule of 40 calculation was 24.0% as of Q4 2022's results, so the firm is in need of some improvement in this regard, per the table below:

(Source - Seeking Alpha.)

Future Prospects For Playtika

In its last earnings call ( Source - Seeking Alpha ), covering Q4 2022's results, management highlighted the growth of its AI-powered Digital Studio platform, which is expected to 'take a bigger role across [its] studios game operation…to digitize the gaming operation space."

Leadership is focused on aligning the firm's expense structure with its perceived revenue growth trends.

However, increasing marketing costs for its new games have forced the company to "suspend our new game development pipeline until the ROI for new games is economically viable."

This situation is likely the fallout from the changing IDFA policies from the major mobile platform operators.

Looking ahead, management guided full year 2023 revenue to approximately $2.6 billion at the midpoint of the range, which, if achieved, would be around 2022's results, so no topline growth expected.

Adjusted EBITDA, which typically excludes stock-based compensation and one-time items, is expected to be around $818 million versus $805 million in 2022, or expected growth of 1.6%.

The company's financial position is fairly strong, with ample liquidity and almost all of its debt long-term.

Regarding valuation, Playtika Holding Corp. stock has been pummeled over the past year, although it has rebounded somewhat in recent months.

The primary risk to the company's outlook is the continued high marketing costs associated with new titles, pushing the company to focus on offline marketing.

A potential upside catalyst to Playtika Holding Corp. stock could include rumored private equity acquirer[s] getting serious.

However, PLTK appears to be in a holding pattern of investing in its successful titles while cutting back on its new title marketing and reducing corporate expenses as much as possible.

Until management can cost-effectively reignite revenue growth, I'm Neutral [Hold] on Playtika Holding Corp.

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