Investment thesis
Playstudios (NASDAQ:MYPS) underwent a successful restructuring during 2023 which was aimed at streamlining the organization and reducing costs. The company has since drastically improved its profitability, at the expense of growing its revenue. After failing to re-ignite organic growth post-Covid, this year promises to be the year in which the company demonstrates growth in both its top and bottom line. Furthermore, the company’s low valuation and the optionality due to its huge net cash position make me Bullish on its prospects as an investment opportunity.
Company Overview
Playstudios has a diversified portfolio of 17 games, together with a unique loyalty program that lets players play the games and earn real-world rewards. The loyalty program is thereby able to keep its players engaged for longer, and thus earn more money from them.
Prior to its acquisition of Brainium in 2022, Playstudios had mostly social casino games, with just a couple of casual games. The addition of Brainium increased the number of casual games to eleven. Additionally, the Tetris games for which it acquired exclusive rights in 2021 has further helped diversify Playstudios’ portfolio to a large extent, while also significantly increasing its player base. The restructuring that was initiated in Q1’23 reorganized the company into two separate business segments, namely playGames and playAwards. Additionally, this also led to a total headcount reduction of more than 10%.
The company’s core social casino games have continued to face revenue declines due to competition as well as management’s focus on users with higher spends. The revenue declines have been offset to a certain extent by contributions from Brainium and Tetris. Despite Brainium being fully incorporated into Playstudios’ operating framework at the start of 2023, the integration of the playAwards program into the full collection of Brainium products is expected to be completed only this year. Meanwhile, the Tetris Prime product has grown meaningfully, according to management’s commentary on the 2023 Q4 earnings call. Owing to its success, the license with Tetris has been extended until 2028.
The company’s key priorities for this year were summarized by CEO Andrew Pascal during the Q1 2024 earnings call:
As a quick recap, initiatives in 2024 include a portfolio-wide adoption of our updated MyVIP loyalty program, restoration of MyVegas and MyKonami, the generalization of PlayAwards, the launch of at least one new Tetris title, and an expansion of monetization within the Brainium portfolio. We’re making notable progress in all these fronts, and I believe we’re on our way to exiting the year at an improved run rate.
Financial snapshot
![Playstudios quarterly revenue and adjusted ebitda](https://static.seekingalpha.com/uploads/2024/6/10/48735022-17180413059133534.png)
Created using company data
Throughout 2023 management had shifted its focus away from revenue growth, towards driving higher profit margins. As shown above, this has led to revenue stagnating in recent quarters, while Adjusted EBITDA has significantly increased. In its latest quarter, revenue came in at $77.8 million, which was down 2.8% year over year, though marginally above the prior quarter. Nevertheless, Adjusted EBITDA remained strong at $15.3 million, with a solid margin close to 20%.
Management has focused on maintaining the company’s existing user base, while driving higher payer conversion and spending. This trend is evident when tracking a key metric, which is the virtual currency spend on its marketplace. Despite the continuous decline throughout most of 2023, the last two quarters have shown a significant sequential increase, as shown in the figure below. Furthermore, the integration of the remaining Brainium games into the loyalty platform this year should further support this growth.
![Playstudios platform rewards metrics](https://static.seekingalpha.com/uploads/2024/6/10/48735022-1718041330745258.png)
Created using company data
Valuation
Using the midpoint of management’s guidance for 2024, the company is expected to earn around $67 million in Adjusted EBITDA. In line with analyst estimates, I expect their free cash flow to be close to $40 million after accounting for their internal and growth related investments, as presented in the table below.
![Playstudios valuation](https://static.seekingalpha.com/uploads/2024/6/10/48735022-17180525237271695.png)
My valuation model based on estimates
Based on the estimates above, Playstudios currently trades at an EV to 2024 Adjusted EBITDA multiple of just 2.6 and a Price to 2024 FCF multiple of 7.5. Its most relevant peer in the market today is Playtika (PLTK) which has similar growth rates, yet trades at more than double its valuation with a forward EV/EBITDA ratio of 6.2. Zynga and Sciplay Corp are also industry peers, but are no longer public companies and therefore cannot be used for comparison. They were, however, acquired at valuation multiples significantly higher than what Playstudios is currently trading for.
Potential catalysts for share price appreciation
Capital allocation
The company is in a strong financial position with cash of $133 million (40% of its market cap) and no debt. M&A remains the company’s primary use of its capital, and if done at the right price, could be a positive catalyst for its share price. This was further emphasized by Jason Hahn, the company’s Head of Corporate and Business Development during the Q1 2024 earnings call when he stated:
Yeah, we remain committed around our M&A strategy. There’s a lot of opportunities out there in the market. We have an active pipeline of companies that we continue to engage with on the M&A side. As you know, it’s getting these M&A deals over the line is complex. We need to structure deals that are accretive to our financial profile, both growth and margin. And they also need to be strategically compelling and timed right at the right time when we’re able to transact upon them.
The company also has a $50 million share repurchase program authorized until November this year. Its CEO elaborated on the company’s share repurchases during the quarter, saying:
We restarted our share repurchase program in the first quarter and have bought an additional $4 million of stock for today. We view our share price as deeply discounted and believe buying back our own stock rates value for all shareholders.
Likewise, another catalyst which I believe the market would welcome is the initiation of a special dividend since cash on the balance sheet is expected to build up each quarter going forward.
Launch of Loyalty Platform as a Service
Management has stated that external gaming companies have shown interest towards their unique playAwards loyalty program as it is a compelling way of retaining players. If Playstudios is successful in making such deals, it could become a highly profitable additional revenue stream for the company.
Risks
Current investments don’t bear fruit
As its CEO mentioned during their Q3 2023 earnings call, Playstudios is investing substantially in initiatives such as Loyalty as a service, which currently generates no revenue. There is a chance that these initiatives fail to gain traction in the market and end up being bad investments that destroy shareholder value.
Impact from App Development platform changes
Changes in platform privacy rules could have an adverse impact on its business.
Ongoing lawsuits
According to its 2023 Annual report, the company had received four demands for arbitration during 2023 related to illegal gambling.
Playstudios stock is a Buy
Despite declining revenue in its social casino games, the Brainium and Tetris games are showing strong growth, and provide plenty of room for future margin expansion. Management has executed well in recent quarters and the business is set up to deliver future organic growth, while simultaneously returning capital to shareholders though buybacks. At today’s share price, I believe investors have an attractive risk-reward to initiate a Long position in Playstudios.