For those familiar with the F2P space, the mobile gaming juggernaut Playtika really needs no introduction. But for the uninitiated – Playtika is an Israel-based mobile games publisher that was founded in 2010 by Robert Antokol and Uri Shahak. In 2011 and during its social casino days, the company was bought by Ceasars Entertainment Corporation. A few years later in 2016, the company’s operations were acquired by Giant, a Chinese consortium, and valued at $4.4B. In January 2021 and during mobile F2P gaming’s COVID boom, Playtika filed for IPO, raised an additional $1.88B and exceeded its $22-$24 price target with an opening market price of $33.40!
One year and 8 months later, Playtika’s stock and market cap has been pretty much crushed. The stock is currently down -65% from its 52-week high and sitting very close to its 52-week low. This downward spiral was partially addressed by Playtika in February 2022 with the announcement of “Exploration of Strategic Alternatives”, where its Board of Directors initiated a process to evaluate Playtika’s potential strategic alternatives to maximize value for stockholders. As part of the process, the Board intended to (and maybe to this day) consider a full range of strategic alternatives, which could include a sale of the company or other possible transactions. This was followed by private equity firm Joffree Capital acquiring 25.7% of Playtika’s outstanding shares at 46% premium and to the tune of $2.2B. And Playtika also recently announced that it has commenced a tender offer for a share repurchase.
To understand what exactly is driving Playtika’s market annihilation, we must first understand the company and its business engine. From Playtika’s S-1 , the company’s mission is “to entertain the world through infinite ways to play,” and it is realized through “Technology and Data”. This translates into a company that:
- Acquires companies whose product portfolios have broad appeal and are very fertile for live-ops-driven growth (Jelly Button, Wooga, Seriously, Supertreat, Redecor).
- Plugs them into the proprietary Playtika Boost Platform, a technology-rich suite of 13 services centered around automating, monitoring, and optimizing various product design, user acquisition, and backend game operations.
- Increases portfolio longevity using this platform and through a highly data-driven live operations process.
- There is also an element of in-house game development and live operations, especially for its legacy social casino titles, but most new game development is now being driven by its acquired entities.
Current State Analysis
Even though the above strategy has resulted in decent business growth between 2017-2020, it hasn’t really sustained over the past 2.5 years.
On the financial side of things, the growth of annual revenues is clearly slowing down. EBITDA margins also continue to drop. Although the latter isn’t entirely bad (34% is still quite good), it still isn’t a great operational sign. Further, dropping EBITDA margins will not do any good to healthily growing the company’s cash reserves rapidly that could be deployed in multiple ways, such as financing future M&A activity, paying down debt, share repurchases, etc. Playtika also faces a double whammy due to the poor stock price, now stock cannot be used as a M&A-enabling financial instrument as flexibly as before.
On the users side, average DAUs continue to drop for its active titles, which clearly showcases an aging game portfolio. That said, average daily paying users (DPUs) continue to rise, but at a slower pace compared to previous years.
And finally on the monetization side, both average daily payer conversion and ARPDAUs continue to rise. In absolute terms, this is a good thing because it showcases Playtika’s ability to increasingly put its audience to work.
Three comments and/or caveats on this though:
- While the rise in average daily payer conversion is good, the average number of transactions and average transaction size for these payers is clearly not healthy enough, as showcased by the general slowdown in revenue growth and dropping EBITDA margins.
- Further, ARPDAUs increasing might look good on the surface, but it doesn’t necessarily mean the games are monetizing their audience more efficiently. This is more related to the portfolio DAUs dropping and therefore artificially increasing the ARPDAUs due to a more payer-concentrated audience.
- The ARPDPU metric showcased below is more telling of efficiently monetizing the existing paying audience, but it has been rather flat.
All in all, Playtika’s core business metrics don’t seem to be looking as healthy as they did when the company’s S-1 dropped. Organic growth seems to be slowing, and that’s likely having a negative knock-on effect for inorganic growth prospects. While some of the company’s recent performance could be attributed to more macro-market factors (IDFA deprecation, post-COVID slump across mobile gaming, etc.) that are out of Playtika’s control and are also being felt by other big mobile gaming publishers, the company’s stock price trend clearly showcases a very unhappy market!
Can Playtika Turn Around?
Given the above, Playtika has three notable future growth opportunities to orchestrate a potential turnaround. However, each of these are fraught with their own inherent risks.
#1: Active Portfolio Diversification and Organic Growth
Playtika has a proven track record of using its technology and processes to grow game revenues over multiple years. That said, five of its oldest casino-themed games still contribute ~47% of total Q2 2022 revenues, while the rest is driven by their casual games portfolio. Since Playtika has a 20+ active game portfolio, the high amount of revenue concentration in old Casino games is slightly unsettling. In a post-IDFA world, diversifying out of social casino as soon as possible is almost a necessity due to the genre heavily depending on efficient user acquisition tactics, which isn’t as easy as it used to be.
While Playtika’s latest earnings report showcases an increase in YoY revenue contribution by its Casual portfolio, it masks a couple fundamental issues with both the Casual and Casino portfolios.
First, Playtika’s key revenue-generating games in its Casino portfolio are steadily dropping in revenues. In other words, this showcases a heavy dependency on social casino games that are more on a path to sunsetting versus sustainable growth. It also artificially accelerates the revenue mix shift that Playtika is trying to showcase to the market.
Second, on the Casual side, while it does seem like this portfolio’s revenues are steadily growing, it is mostly driven by two games – Solitaire Grand Harvest and June’s Journey. Both titles are very old, and even though they might now have loyal paying user bases, they too will eventually get onto a path of sunsetting. Further, its acquired Casual titles (Redecor, Best Fiends, and Board Kings) are seeing a steady drop in revenues, which showcases some cracks in Playtika’s ability to acquire long-lasting titles and sustainably grow them using its live operations engine.
All in all, Playtika’s ability to supercharge growth through its active portfolio and acquired titles is looking slightly grim over the medium term. While many of the titles will continue to generate significant absolute revenues over the years to come, Playtika clearly needs to make a fundamental change in the way it approaches active portfolio live operations to get more of them onto a sustainable growth path or at least reduce the rate of bleeding. On top of that and with the backdrop of dropping DAUs, Playtika also needs to figure out efficient user acquisition tactics to navigate the post-IDFA waters. This is not an easy-to-solve problem, though, since so much is dependent on the platform holders, but it isn’t entirely impossible either.
#2: New Game Development and Organic Growth
Given Playtika’s product portfolio growth strategy, it is likely that new game development will continue to come through its acquired studios. Unfortunately, none of them have been able to launch any significantly successful new games since 2017, a year when Wooga’s “June’s Journey” and Jelly Button’s “Board Kings” were launched. Playtika knows this, and it did set up a Casual Games Lab back in 2019. It’s also made some new acquisitions since then, such as Redecor, which could prove to be new pockets for innovation. That said, while there are some new games currently in soft-launch, more recent and more frequent success with this growth avenue remains to be proven out.
The most recent example is Playtika’s newest launch – Switchcraft (from Wooga). Unfortunately, the game’s performance isn’t looking so great from a sustainable revenue growth perspective. And that underscores Playtika’s struggle to launch and scale new in-house titles and thereby truly drive organic growth.
While catching lightning in a bottle is always hard in a highly competitive mobile F2P market, the only way to find it is to take as many shots at goals as possible. We’re not entirely sure what the new games’ funnel metrics look like, but given that there’s no mention of a statistic like “new games currently in development” in its earnings presentations, it would lightly indicate a less than required focus on testing (and killing) a high number of new game concepts across the acquired studios. If Playtika wants to drive organic growth through new game development, that track record definitely needs to change.
#3: New Acquisitions and Inorganic Growth
M&A is a cornerstone of Playtika’s portfolio growth strategy, but it’s highly selective too, with only a handful of casual game developer acquisitions in the past 5 years. Further, 2020 and 2021 showed us how heated the mobile M&A market can get and how quickly the potential target pool is drying up. It also means the remaining casual genre acquisition targets will likely grow more expensive.
Further, Playtika has heavy debt ($2.4B in 2021 – a $200M increase since 2020) and continues to pay significant portions of its operating profits in interest:
- 2020: 50% of operating profits were paid in interest
- 2021: 27% of operating profits were paid in interest
- H1 2022: 24% of operating profits were paid in interest
While Playtika can handle this debt, it does reduce flexibility to make big acquisitions. On top of that and as previously mentioned, Playtika cannot use stock as a strong financial instrument in M&A activity given where the stock price is today. And finally, even though Playtika’s free cash flow is steadily increasing (currently ~$500M), it’s not enough to make any major acquisitions, such as the $600M Redecor deal that is currently not looking like such a good move given the game’s revenue trajectory. That said, Playtika has also acquired some great assets like Wooga for $100M, and could potentially repeat it with a couple smaller acquisitions. But finding Wooga-like diamonds at attractive prices isn’t easy, and Playtika’s M&A team clearly has their work cut out for them.
A potential 4th path: One can argue whether or not this would really be a “turnaround strategy”, but Playtika could also consider being acquired or merging with another gaming entity – we shouldn’t forget that Playtika did try to seriously look at strategic options earlier this year, and it hasn’t amounted to anything significant yet. On getting acquired, Joffree Capital acquiring a 25.7% stake is somewhat notable and it remains to be seen whether Playtika will turn into another private equity turnaround scenario. On merging – while Playtika has a proven live operations engine, it clearly needs new games. And there are companies out there who are great at making new games (more than just once), but are in dire need of battle-tested and highly-optimized live operations technology and data-informed processes. Again, we’re mostly speculating at this point, but a merge with the right entity could make a lot of sense.
In conclusion, it does seem like Playtika has backed itself into a corner. Future growth through any one of the means above requires a very close look at the company’s fundamentals, a fresh perspective on how to turn the company’s fortunes around, and then followed up with tight execution of that strategy by a leadership team that is willing to put in a lot of hard work. It is a tall order, and maybe the easiest way out is ultimately an acquisition or merger of Playtika itself.
This essay was written by Abhimanyu Kumar.
