The Rundown (PlayStudios)

The Rundown – Your weekly SPAC Deep Dive (09/05/21)

PlayStudios is a Unique Take on Mobile Games 

Playstudios is the developer and operator of Free to play casual video games for mobile and social platforms. The developer separates itself from its peers through a unique loyalty marketing platform, which creates a new entertainment experience for players and provides actionable business insights to its partners.

While the company went public through a SPAC merger with Acies Acquisition at a valuation of $1.39 Billion back in June, the stock has seen a huge selloff, with shares now trading $5 per share. Should investors wait for the stock to bottom out or is this a good time to buy the dip? 

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Retaining A Mass Market 

With the popularity of gaming soaring over the last few decades, the aggregate gaming market has now eclipsed that of music, movies and books with a value of over $152 Billion. The Mobile Gaming market now makes up a large chunk of the total market and is estimated to have a value of around $68.5 Billion.

Furthermore, the mobile market is expected to grow at a CAGR of 24% over the next decade. While most games have a huge addressable market, the issue with mobile customers is not scale but retention. 

The reason most mobile games are financially compelling for game developers is the result of In App Purchases (IAPs), which are at the center of the feedback loop in the game. This has prompted many console and PC game developers to release versions of their games including Activision Blizzard, Electronic Arts and even Nintendo.

The real challenge arises when developers need to keep players engaged with the same game through various updates, while ensuring that average revenues per user scale over time. 

The Loyalty Lift 

Playstudios has a unique take on mobile games with a focus on a loyalty program to drive player retention, engagement and monetisation. The developer believes that the typical decline seen in legacy games can be effectively offset through a loyalty program lift. The loyalty program involves a virtuous cycle where the company’s games offers players in app app points, which the players can redeem in the real world.

In exchange, the company’s partners promote these apps to drive back players into the digital world where they can repeat the cycle of earning points. The company’s approach seems to be paying off, with nearly half of the 4.2 million Monthly Active Users making purchases through reward points. 

In total, customers have purchased rewards worth over $500 Million from 275 entertainment, retail and travel brands. Some notable partners include the Bellagio, MGM Grand and the Norwegian Cruise Line. This has also helped improve the total time spent on the company’s games at 56 minutes per day.

Playstudios is now moving from the Casino space with a $5.5 Billion revenue opportunity to the complementary segments of gaming. This includes Brain & Puzzle, Adventure, Simulation, Action, Arcade, RPG and Strategy, which offers a lucrative opportunity of over $65 Billion. 

Proven Growth Strategy 

Playstudios plans to leverage growth by optimising its existing core products and expanding its portfolio through new games and acquisitions. Over the next couple of years, the company plans to expand to the Bingo and RPG market.

These markets have a large install base with growing interest and limited competition, making them highly suitable to develop for. By leveraging it’s loyalty benefits and partner integrations, it can differentiate itself from the other games in the same niche.

The company has a proven strategy to grow its games by leveraging its loyalty mechanics and player network. Every product developed and launched by Playstudios has achieved over 150,000 Daily Average Users within the first three weeks of cross promotion in its player network, with organic traffic accounting for around 50%-60% of the traffic.

Over the next year, the company plans to launch Vegas Bingo and Kingdom Boss, which is expected to generate an additional $100 Million in revenue by FY22. 

Significant Valuation Discount 

Playstudios generated $270 Million in revenues for FY20, which was only up 12.7% compared to the prior year. Notably in the past, the company has consistently shown top line growth of more than 20%. The decline in growth can primarily be attributed to slower development times due to the pandemic as development studios found it more difficult to adopt to a remote schedule.

Playstudios now expects revenue growth to get back on track with revenues around $320 Million in FY21 and $435 million in FY22. The company is also investing in growth through user acquisition spending from the money from its SPAC deal. Playstudios forecasts spending on User Acquisition to be around 29%, which is up from 19% last year.

Essentially user acquisition spending is nearly double the spend of last year at $94 million. This should ensure that the company achieves its revenue growth target for FY22 with margins expanding as user acquisition spending throttling back to 24% of revenues. 

The company currently boasts a value of $630 Million and has taken a beating since the stock first started trading. Despite boasting a strong portfolio of games infused with a loyalty system, shareholders in the SPAC have been redeeming shares, which has pushed prices down over the last month.

On the day the SPAC merger was approved, the company’s shares tanked 11%. In total, 11.3 million shares were redeemed at $10, which caused the SPAC to return $113 million to shareholders. At its current market value, the company is trading at a forward revenue multiple (FY22) of 1.44x.

Additionally, there isn’t any short term risk of dilution as the company has plenty of liquidity to fund development and short term operations with $220 million from the SPAC transaction and another $75 million in a credit facility. While there are significant risks with the mobile gaming market, at its current valuation, the company is trading at a significant discount to other mobile developers like Zynga and Glu. 

Bottom Line 

Playstudios has a unique take on mobile gaming with a focus on loyalty program to drive player retention, engagement and monetisation. Despite continuing to deliver double digit revenue growth through a strong portfolio of games, the stock has seen a sharp selloff since the SPAC deal.

If the stock was a good deal at $10, it is a fantastic buy at $5. Shareholders looking at a unique take in the Mobile Gaming market should consider buying shares at current prices. 


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