Stock Analysis

PLAYSTUDIOS, Inc.'s (NASDAQ:MYPS) Intrinsic Value Is Potentially 78% Above Its Share Price

NasdaqGM:MYPS
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Key Insights

  • PLAYSTUDIOS' estimated fair value is US$6.89 based on 2 Stage Free Cash Flow to Equity
  • Current share price of US$3.87 suggests PLAYSTUDIOS is potentially 44% undervalued
  • Analyst price target for MYPS is US$5.21 which is 24% below our fair value estimate

In this article we are going to estimate the intrinsic value of PLAYSTUDIOS, Inc. (NASDAQ:MYPS) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for PLAYSTUDIOS

Is PLAYSTUDIOS Fairly Valued?

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF ($, Millions) US$18.0m US$25.9m US$34.1m US$41.8m US$48.6m US$54.5m US$59.5m US$63.7m US$67.2m US$70.2m
Growth Rate Estimate Source Analyst x1 Est @ 43.99% Est @ 31.41% Est @ 22.61% Est @ 16.45% Est @ 12.13% Est @ 9.12% Est @ 7.00% Est @ 5.52% Est @ 4.49%
Present Value ($, Millions) Discounted @ 7.8% US$16.7 US$22.3 US$27.2 US$30.9 US$33.4 US$34.8 US$35.2 US$34.9 US$34.2 US$33.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$303m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.1%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.8%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$70m× (1 + 2.1%) ÷ (7.8%– 2.1%) = US$1.3b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.3b÷ ( 1 + 7.8%)10= US$592m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$895m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$3.9, the company appears quite good value at a 44% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
NasdaqGM:MYPS Discounted Cash Flow February 25th 2023

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at PLAYSTUDIOS as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.8%, which is based on a levered beta of 0.962. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for PLAYSTUDIOS

Strength
  • Currently debt free.
Weakness
  • Shareholders have been diluted in the past year.
Opportunity
  • Forecast to reduce losses next year.
  • Has sufficient cash runway for more than 3 years based on current free cash flows.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Not expected to become profitable over the next 3 years.

Next Steps:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For PLAYSTUDIOS, there are three essential items you should explore:

  1. Risks: For example, we've discovered 1 warning sign for PLAYSTUDIOS that you should be aware of before investing here.
  2. Future Earnings: How does MYPS's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Valuation is complex, but we're helping make it simple.

Find out whether PLAYSTUDIOS is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.