Playtika Seeks Diversification In Changing Mobile Game Environment (NASDAQ: PLTK)

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Girls enjoy playing games too

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A Quick Take On Playtika Holding

Playtika Holding (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.

While PLTK has a number of new games launched or in the process of being launched, it’s difficult to see a material upside catalyst to the stock in the near-term given flat growth and a rising cost environment.

Accordingly, my outlook for PLTK is a Hold.

Company

Herzliya Pituach, Israel-based Playtika 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.

Market & Competition

According to a 2020 market research report by Newzoo, the global market for mobile gaming is expected to reach $ 77.2 billion by the end of 2020.

This represents an increase of 13.3% from 2019.

Also, of the 2.7 billion gamers worldwide that are projected to play during 2020, 2.6 billion will play games on mobile devices.

However, only 38% will pay to play games on mobile devices, leaving 62% to play for free.

Notably, Playtika has improved its Daily Payer Conversion, from 2.1% for the nine months ended September 30, 2019 to 2.5% in the same period in 2020.

Major competitive or other industry participants include:

PLTK’s Recent Financial Performance

5-quarter gross profit

Seeking Alpha and The Author

5-Quarter gross profit

5-Quarter Gross Profit (Seeking Alpha and The Author)

5-quarter operating income

5-Quarter Operating Income (Seeking Alpha and The Author)

5-Quarter EPS

5-Quarter EPS (Seeking Alpha and The Author)

(Source data for above GAAP financial charts)

In the past 12 months, PLTK’s stock price has fallen 47.5 percent vs. the US S&P 500 index’s rise of 15.3 percent, as the chart below indicates:

52-Week Stock Price

52-Week Stock Price (Seeking Alpha)

(Source)

Valuation Metrics For PLTK

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

Measure

Amount

Market Capitalization

$ 7,250,000,000

Enterprise Value

$ 8,790,000,000

Price / Sales

2.87

Enterprise Value / Sales

3.51

Enterprise Value / EBITDA

11.70

Free Cash Flow [TTM]

$ 498,960,000

Revenue Growth Rate [TTM]

6.68%

Earnings Per Share

$ 0.70

(Source)

As a reference, a relevant public comparable would be Rovio Entertainment (OTC: ROVVF); shown below is a comparison of their primary valuation metrics:

Metric

Rovio Entertainment (OTC: ROVVF)

Playtika (PLTK)

Variance

Price / Sales

1.85

2.87

55.1%

Enterprise Value / Sales

1.38

3.51

154.3%

Enterprise Value / EBITDA

10.14

11.70

15.4%

Free Cash Flow [TTM]

$ 41,080,000

$ 498,960,000

1114.6%

Revenue Growth Rate

0.15

6.7%

-55.5%

(Source)

Commentary On Playtika

In its last earnings call, covering Q3 2021’s results, management highlighted its recent acquisition of Reworks as an example of the company’s first move beyond traditional games and into, in this case, the field of personal living design.

The company thinks that games and apps are converging, so the skill sets it has developed in games will apply to apps and enable it to generate greater and more diversified growth streams in the future.

PLTK also recently launched Switchcraft and Merge Stories (soft launch) and management has plans to soft launch another game in 2022.

As to its financial results, revenue grew only slightly due to high comparisons to Q3 2020 from a sharp rise in results during the heart of the COVID-19 pandemic.

Notably, the firm’s casual portfolio of games is now 49% of revenue, which management is pleased to point out is part of its diversification strategy.

On the all important user acquisition cost side, the company is moving marketing resources to the Android system due to Apple’s changes to Facebook’s ability to use data from other apps, which is reducing developer ROI and increasing acquisition costs.

This will likely be a short-term benefit, however, as Google will probably adopt some form of Apple’s changes in order to retain greater control of the app monetization market.

These developments are hurting Facebook and the game app developer ecosystem in the short-term, at least until Facebook can rebuild its app monetization stack to compensate for the mobile platform changes.

The mobile app ecosystem is undergoing a period of significant change, with the results being higher acquisition costs, so it is not surprising to see firms make moves to diversify their revenue streams.

While PLTK has a number of new games launched or in the process of being launched, it’s difficult to see a material upside catalyst to the stock in the near-term.

Accordingly, my outlook for PLTK is a Hold.



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