IPO investing remains an attractive option for growth investors. A company generally enters the equity market to fund its growth initiatives, which means investors can expect the stock to expand top-line revenue and earnings at a higher pace compared to the overall market.
Over the last few years, several IPOs such as Zoom Video (ZM), Shopify (SHOP), and The Trade Desk (TTD) have already created massive wealth for early investors. Here, we look at another such company that should be on the radar of growth investors.
Giant Network Group and Yunfeng Capital acquired mobile gaming company Playtika (PLTK) from Caesars Entertainment for $4.4 billion in 2016. PLTK now has a market cap of $12.9 billion.
Playtika: A Stellar IPO
The coronavirus pandemic has forced people to stay at home more and go out less. This has caused a boom in the gaming industry. The global video game market is expected to grow to $300 billion in 2025, providing gaming companies with enough drivers for top-line growth.
Within this sector, mobile gaming is set to grow sharply. Leading investment bank Morgan Stanley expects the mobile gaming market to grow at a CAGR (compounded annual growth rate) of 15% from 2019 to 2022, from a recorded value of $70 billion to $100 billion.
So it wasn’t surprising when PLTK listed its stock at a price of $27 on its January 15th IPO instead of the expected $22-$24 range that most analysts had expected. PLTK sold 18.5 million shares thereby raising $1.9 billion.
The stock closed day one at $30.24, went up to $33.81 on February 8 before falling to its current levels of about $32. The promoters of the company have 80% of the voting rights at PLTK even after the IPO.
Solid Numbers
PLTK has a player base of over 35 million active monthly users. The company develops and publishes mobile games for its customers with a special focus on casino games. It follows a freemium model where people log in to play free games at first and then pay to play the upgraded version. It is clear that this conversion rate for PLTK is high.
In the 12-months ended September 30, 2020, the company clocked $2.29 billion in revenue, $46.1 million in net income, and $815.2 million in EBITDA (earnings before interest, taxes, depreciation, and amortization). Around 80% of the company’s revenue comes from the mobile platform while 20% comes from the web. In-app purchases account for 95% of its revenues.
For the nine months ended September 30, 2020, PLTK reported a net income of $16 million on revenue of $1.8 billion compared to net income of $259 million on revenue of $1.4 billion in the corresponding period in 2019.
For the nine months ended September 30, 2020, PLTK had nine out of the top 100 grossing mobile games, more than any company in the space. These included five titles that ranked first in their respective categories: Slots, bingo, hidden objects, solitaire, and poker.
Playtika’s high debt remains a concern
PLTK has grown by acquiring game studios. It acquired seven studios and out of the top nine games, seven come from the stables of the acquired studios. The top nine games generate 97.6% of Playtika’s revenue. Playtika paid $645 million between 2017 to 2019 for its acquisitions. The company had $2.3 billion in debt at the time of filing its IPO.
Of the ten analysts covering the stock, eight have a Buy rating on the stock, with 2 rating it a Hold. Target prices for the stock range from $33 to $42, which’s an upside of 3%-35%.
Favorable POWR Ratings
PLTK has an overall rating of A, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. PLTK has a grade of A for Quality and B for Growth. In the 24-stock Entertainment - Toys & Video Games industry, it is ranked #1.
The stock is also rated for Sentiment, Value, Momentum and Stability. Get all of PLTK’s ratings here.
The verdict
PLTK is scheduled to report its earnings for the fourth quarter of 2020 on February 25th. There is a good chance for the stock to gain momentum if it manages to beat Wall Street estimates or provides better-than-expected guidance.
The allure of mobile games will likely continue even after the pandemic has been brought under control and life returns to normal. PLTK is a market leader with multiple growth drivers, secular tailwinds, and a rapidly expanding addressable market.
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PLTK shares were trading at $32.06 per share on Wednesday morning, up $0.56 (+1.78%). Year-to-date, PLTK has gained 1.39%, versus a 4.21% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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