PlayStudios’s stock price has taken a beating over the past six months, shedding 44.5% of its value and falling to $0.60 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in PlayStudios, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think PlayStudios Will Underperform?
Even with the cheaper entry price, we're swiping left on PlayStudios for now. Here are three reasons we avoid MYPS and a stock we'd rather own.
1. Decline in Daily Active Users Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like PlayStudios, our preferred volume metric is daily active users). While both are important, the latter is the most critical to analyze because prices have a ceiling.
PlayStudios’s daily active users came in at 2.21 million in the latest quarter, and over the last two years, averaged 15% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests PlayStudios might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
PlayStudios’s full-year EPS flipped from negative to positive over the last four years. This is encouraging and shows it’s at a critical moment in its life.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
PlayStudios has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 14.2%, lousy for a consumer discretionary business.
Final Judgment
PlayStudios doesn’t pass our quality test. After the recent drawdown, the stock trades at $0.60 per share (or a forward price-to-sales ratio of 0.3×). The market typically values companies like PlayStudios based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. Let us point you toward the most dominant software business in the world.
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