Bank of America downgraded Playtika (PLTK) to an Underperform rating (From Neutral) and cut their 12-month price target on the digital entertainment stock to $8.00 (From $11.00) based on analysts' view that the company faces a “muted” long term growth trajectory with limited chances for re-rating through 2024.
BoA also highlighted that an upside catalyst, such as an aggressive FY24 guidance was unlikely in the foreseeable future.
Although PLTK's portfolio's maturity has led to an excellent margin profile, it poses a challenge for future growth. The revenues from PLTK's long-standing social casino games, operating for over 10 years, seem to be gradually decreasing. Shifting towards newer and more casual titles might impact margins as these titles are less profitable compared to the top social casino titles.
While management has outlined an M&A-driven growth strategy, Bank of America notes that it is crucial not to presume that acquisitions will ensure profitable growth in '24 without additional information on opportunity size, target metrics, and execution pace.
Additionally, the historical precedent for a high-volume M&A growth strategy is unfavorable, as seen in Embracer's stock price, which has remained flat since 2017.
PLTK operates in a market projected by BofA to grow by +2% Y/Y in '24, contrasting with the consensus-implied +5% Y/Y. The mobile gaming industry witnessed a second consecutive year of decline in 2023 (according to Data.ai), and there are limited catalysts for a rebound in 2024.
Investors might show a preference for pure PC/Console publishers (e.g., EA, Nintendo, or Capcom) whose market is anticipated to grow above trend due to console cycle maturation.
Shares of PLTK are down 3.02% in mid-day trading on Thursday.