Regulatory Headwinds And Category Declines Will Pressure Loyalty Platform Yet Leave Upside Potential

Catalysts

About PLAYSTUDIOS

PLAYSTUDIOS develops free to play mobile and web games that integrate real world loyalty rewards through its playAWARDS platform.

What are the underlying business or industry changes driving this perspective?

• Although Win Zone sweepstakes is seeing improving retention, engagement and monetization across 15 states and targets an estimated US$3.5b to US$4b addressable market, the broader sweepstakes category is experiencing regulatory contraction that has already reduced the total market size by roughly 25%. This could limit the scale and timing of any future revenue contribution.
• Although Tetris Block Party testing shows encouraging user acquisition, retention and monetization metrics and aims to turn a well known franchise into a larger mobile presence, the company is still in early go to market testing. Any delay or misstep in the broader rollout could prolong current revenue pressure and keep earnings under strain.
• Although the direct to consumer channel reached US$7.7 million in revenue in the quarter and represented 16.7% of in app purchase revenue after Apple policy changes, the overall business is seeing revenue decline of 19.1% year over year and 2.7% sequentially. Any margin benefit from lower platform fees may be offset if total revenue continues to contract.
• Although the playAWARDS loyalty ecosystem and events such as the myVIP World Tournament of Slots strengthen player relationships and can support longer term monetization, the social casino category is under pressure with double digit DAU and MAU declines. This raises the risk that loyalty driven engagement may not fully translate into future revenue or net margin stability.
• Although the company is adopting AI across development, user acquisition modeling and live operations with an aim to improve efficiency, recent adjusted EBITDA contraction of 50.5% year over year to US$7.2 million shows that cost savings and productivity gains are being absorbed by revenue headwinds and growth investments. This could limit near term improvement in operating margins.

Assumptions

This narrative explores a more pessimistic perspective on PLAYSTUDIOS compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming PLAYSTUDIOS's revenue will decrease by 4.5% annually over the next 3 years.
• The bearish analysts are not forecasting that PLAYSTUDIOS will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate PLAYSTUDIOS's profit margin will increase from -15.1% to the average US Entertainment industry of 10.4% in 3 years.
• If PLAYSTUDIOS's profit margin were to converge on the industry average, you could expect earnings to reach $22.3 million (and earnings per share of $0.21) by about January 2029, up from $-37.4 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.2x on those 2029 earnings, up from -2.2x today. This future PE is lower than the current PE for the US Entertainment industry at 18.3x.
• The bearish analysts expect the number of shares outstanding to decline by 5.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.27%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Social casino and casual titles are facing broad category headwinds, with MAU down 24.9% year over year and DAU down 25.3% year over year. If this long term pressure on audience size continues or worsens, it could weigh on revenue and limit any improvement in earnings.
• The broader sweepstakes market has already seen a roughly 25% contraction in total addressable market. Further regulatory tightening in key states could restrict Win Zone's long term growth potential, which would cap a potential offset to pressure on net margins.
• Management has reduced the fixed cost base, but this came with trade offs in the pace of new content, live operations and product development. If a leaner cost structure slows effective game updates and new launches over time, it could dampen user engagement and keep adjusted EBITDA margins under pressure.
• Growth projects like Win Zone and Tetris Block Party are still in testing. If long term user acquisition, retention and monetization trends do not scale as expected, the company could continue to see revenue pressure while growth investments keep earnings and net margins subdued.
• Direct to consumer and ad monetization initiatives support gross margin, but they are currently offset by declining revenue scale and increased investment in new projects. If these mixed trends persist over the longer term, overall operating margins and earnings could remain constrained.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for PLAYSTUDIOS is $1.0, which represents up to two standard deviations below the consensus price target of $1.75. This valuation is based on what can be assumed as the expectations of PLAYSTUDIOS's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $2.5, and the most bearish reporting a price target of just $1.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $215.8 million, earnings will come to $22.3 million, and it would be trading on a PE ratio of 6.2x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of $0.66, the analyst price target of $1.0 is 34.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.