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Playtica (NASDAQ:PLTK) was the top communications services gainer early Tuesday, up to 3.7% after Citi upgraded the game maker to Buy with a valuation that is “compelling at current levels” and some potential catalysts.
The bank is not substantially changing its estimates and notes that in recent years growth has slowed and, along with this, the multiple has compressed. But the risk-reward proposition now looks good, wrote analyst Jason Bazinet.
That includes some catalysts that could send the stock higher: Playtika (PLTK) is still in the midst of a strategic review launched nearly two years ago, and “some private equity firms have reportedly expressed interest in the company,” Bazinet noted. . If Playtika is not sold and that review is cancelled, the company could begin buying back shares (as the cash on hand totals more than double the public listing value).
Meanwhile, Playtika (PLTK) is increasingly relying on its own distribution platforms versus third-party mobile app stores, which could lead to higher gross margins, Bazinet noted.
And if revenue exceeds $2.7 billion (which Citi expects by 2025), the company would qualify in Israel as a Special Preferred technology Company, which could reduce its tax rate by 300 basis points and help free up the flow of box.
Citi still builds its price target off a multiple of 8.5 times free cash flow per share in 2024, bringing it to $11, implying an additional 25% upside.
