PLTK - Playtika Makes Gains In Direct-To-Consumer Approach

2023-09-19 13:05:16 ET

Summary

• Playtika Holding Corp. offers mobile games on social networks and mobile platforms worldwide.
• The company is projecting a slight revenue decline in 2023 as it focuses on enhancing its direct-to-consumer approach.
• Until we begin to see a return to revenue growth, I remain Neutral [Hold] on Playtika Holding Corp. stock.

A Quick Take On Playtika

Playtika Holding Corp. ( PLTK ) offers mobile games on social networks and mobile platforms worldwide.

I previously wrote about Playtika with a Hold outlook.

PLTK is projecting a slight revenue decline in 2023 as it seeks to enhance its direct-to-consumer approach.

However, until we see the beginnings of a return to revenue growth, I remain Neutral [Hold] on Playtika Holding Corp.

Playtika Overview And Market

Located in Herzliya Pituach, Israel, Playtika develops and acquires free-to-play mobile games, many of which rank among the top 100 highest-grossing titles.

The company is led by co-founder, Chairman, and CEO Robert Antokol, who has a background in electrical engineering.

Playtika's game collection includes:

- Slotomania

- Caesars Slots

- Solitaire Grand Harvest

- Bingo Blitz

- June's Journey

- World Series of Poker

- House of Fun.

PLTK focuses on expanding its repertoire mainly via game acquisitions and promotes its games through online app stores and digital advertising on platforms such as YouTube and Facebook.

With the development team it currently has in place, the company is designing games that resemble those in its pre-existing catalog.

A 2022 market research report by Skyquest revealed that the worldwide mobile gaming industry was worth approximately $101 billion in 2021, with projections to reach $139 billion by 2030.

This signifies a compound annual growth rate [CAGR] of 17.1% from 2023 to 2030.

Market expansion can be attributed to factors such as the widespread adoption of 5G networks, advancements in smartphone technology, evolving consumer preferences, and increased ingenuity among mobile game developers.

Additionally, the growing popularity of Esports, social gaming, and cloud-based gaming options will contribute to this progress.

Major competitive or other industry participants include:

• Tencent

• Activision Blizzard

• Electronic Arts

• Take-Two

• Nintendo

• Ubisoft

• Product Madness/Big Fish

• Others.

Playtika’s Recent Financial Trends

• Total revenue by quarter has continued on a downward trajectory; Operating income by quarter has trended higher in recent quarters.

• Gross profit margin by quarter has been stable to slightly lower; Selling and G&A expenses as a percentage of total revenue by quarter have trended lower in recent quarters.

• Earnings per share (Diluted) have regained their 2021 results levels recently.

(All data in the above charts is GAAP.)

In the past 12 months, PLTK’s stock price has fallen 2.32%:

For balance sheet results, the firm ended the quarter with $985.7 million in cash, equivalents and trading asset securities and $2.4 billion in total debt, of which $11.7 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $432.1 million, during which capital expenditures were $48.0 million. The company paid $102.8 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 free cash flow:

Based on the DCF, the firm’s shares would be valued at approximately $12.23 versus the current price of $10.06, indicating they are potentially currently undervalued.

Sentiment Analysis

I prepared the following sentiment analysis of the firm's most recent earnings call, focusing on negative keyword terms that might indicate a potential downside risk to the business:

Analysts asked management about user acquisition challenges. The firm is seeking to use AI technologies to assist in that regard.

Leadership also indicated M&A deals would be of interest for "additional IP to our portfolio rather than organic development given kind of where we are positioned in the marketplace both from a balance sheet perspective and a capability perspective."

An analyst questioned the sequential drop in DPU metrics or Daily Paying User. Management stated that some of the decline was seasonal but that they see DPU as correlated with revenue, and Q2’s revenue "normalized after a very strong Q1."

Commentary On Playtika

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management highlighted the "record revenues" from its direct-to-consumer platform, which grew 7.6% year-over-year and now makes up 25.7% of the firm’s overall revenues.

Total revenue for Q2 2023 fell 2.5% year-over-year, while gross profit margin also dropped by 1.0%.

Selling and G&A expenses as a percentage of revenue decreased 2.4% YoY, a positive signal indicating improving efficiency and cost management.

Operating income rose a hefty 24.7% year-over-year to $139.2 million.

The company's financial position is solid, with plenty of cash, significant long-term debt, but strong free cash flow.

PLTK’s net LTM leverage multiple was 1.8x. This calculation is based on the current amount of debt minus cash compared to trailing twelve-month adjusted EBITDA.

Looking ahead, management is guiding 2023 full-year revenue to decline about 0.8% versus 2022.

If achieved, this would represent a slight reversal to revenue decrease versus 2022’s growth rate of 1.26% over 2021.

In the past twelve months, the firm's EV/EBITDA valuation multiple has fallen about 14.4%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include continued success with its DTC (Direct-To-Consumer) marketing approach.

The growth in its DTC efforts could help offset the negative effects of mobile platform advertising challenges after major policy changes by Apple and Google to make ad tracking more challenging for advertisers.

However well the company does in its DTC marketing efforts, we don’t know how quickly this will return the firm to material revenue growth.

In the meantime, management may use the firm’s resources to make targeted acquisitions for IP development reasons.

For the near term, though, I’m Neutral [Hold] on Playtika Holding Corp. until we begin to see revenue growth again.

For further details see: