Playstudios Q2 Earnings: Bargain Valuation Amid Persistent Organic Growth Challenges (Rating Downgrade)

Investment Thesis - Playstudios (NASDAQ:MYPS) shares have declined nearly 30% since June, primarily due to weak performance in the social casino segment and underwhelming results from the new Tetris game launch [2] - Management has lowered revenue and adjusted EBITDA guidance, indicating challenges ahead, while capital allocation strategies will be crucial for shareholder returns [2][7] - The current valuation is appealing, with net cash accounting for over half of the market cap, leading to a downgrade of MYPS shares to a Hold [2][12] Revenue Performance - The social casino segment, particularly POP slots, has experienced continued headwinds, leading to a reduction in revenue guidance from $320 million to$290 million [3][5] - Execution issues have been cited as a significant factor in the underperformance of POP slots, with management expressing optimism for future stability at lower performance levels [3] New Game Launch - The Tetris Block Puzzle game was expected to drive revenue growth but has fallen short of expectations due to high user acquisition costs, despite positive feedback [4] - Management is optimizing user acquisition strategies and plans to release an additional Tetris game later this year or early in 2025 [4] Financial Guidance - Adjusted EBITDA is now expected to be $57.5 million, down from$67.5 million, indicating a year-over-year revenue decline of 9% in H2 2024 [5] - Despite revenue declines, adjusted EBITDA margins are anticipated to remain stable at around 20%, supported by growth in casual games and cost reductions [5] Loyalty Platform Outlook - The company's Loyalty as a Service offering has seen limited traction, leading management to shift focus away from this initiative, resulting in a less optimistic near-term outlook [6] Capital Allocation Strategy - With a significant cash balance relative to market cap, capital allocation is critical for driving shareholder returns through share buybacks and acquisitions [7] - The company has $46 million remaining on its repurchase authorization, which is expected to be utilized actively given the current valuation [7] Valuation Analysis - At a share price of$1.55, Playstudios has a market cap of $193 million and an enterprise value of$87 million, trading at an EV/adjusted EBITDA multiple of 1.5 [8] - The company is expected to convert around 30% of adjusted EBITDA to free cash flow (FCF), projecting FCF for FY24 at approximately $17 million [9] Peer Comparison - Despite weak financials, Playstudios' valuation is considered undemanding, especially compared to peers like Playtika (PLTK), which trades at a Price/FCF multiple of 6 [10]