As adtech companies continue to trade like value companies, we have been looking to increase our exposure to this massive growth industry at a significant discount to what we believe the fair value to be. This has led us to the app monetization market, where companies like ironSource (IS), Applovin (APP), and Digital Turbine (APPS) dominate. We think valuations have compressed so much across all of these names that each looks like a fine investment, but we are specifically looking to build a position in IS over the coming months.
In the case of IS, we have a hyper-growth, profitable mid-cap company trading like it mills steel, rather than leading the way in the growing global app economy. How can one justify a company trading at a FWD PE of 18 when it has been growing revenues at a 70% CAGR since 2019? We expect a furious recovery in the stock price one the indiscriminate panic selling finally abates across the broader market.
Company Overview
ironSource (IS) is a leading business platform that enables mobile content creators to prosper within the App Economy. App developers use ironSource's platform to turn their apps into successful, scalable businesses. The ironSource platform also empowers telecom operators to create a richer device experiences for their customers. By providing a comprehensive business platform for the core constituents of the App Economy, ironSource allows customers to focus on what they do best, creating great apps and user experiences, while they enable their business expansion in the App Economy..... Essentially, through acquisitions and internal development, IS aims to be the centralized platform for app-based businesses to carry out all critical business functions, from monetization and marketing to advanced testing for designers.
IS benefits from a number of secular growth trends, including the shift from desktop to mobile advertising, growth in mobile gaming, and expansion of the app economy. According to eMarketer, the average adult in the US spends more than four hours per day on their mobile phone, with more than 80% of this time spent on mobile apps, such as gaming or social media apps. As mobile phone usage continues to increase and more of the developed world becomes digitized, ironSource is well placed to leverage these structural trends.
Case Study Illustration of Concept:
Source: IS Q4 2021 Investor Presentation
This case study shows how IS is partnering with the largest gaming companies in the world to help them better analyze performance of their games, especially when it comes to more effective ad monetization. In the case of Gameloft, IS implemented its real-time auction technology to allow advertisers to live bid on ad spots within the games. This solution helped Gameloft to 4x its average revenue per daily active user. What company wouldn't be willing to pay for a platform that enables them to generate ROIs like that?
Key Investment Points
We are looking to buy 2024 LEAPS once written (calls only go out to 2023 at this time)
We are debating a small position in the 2023 calls options at $10 for under $0.20 each contract as a way to capitalize on short-term pricing inefficiencies, but the fear in the market may prevent a full recovery in the 7 months time we get via these calls
Stock Price as of 4/29: $3.83
While IS did go public via SPAC, the deal structure was different from most, as it was led by one of the premier tech PE funds, Thoma Bravo. There are no warrants in the cap stack threatening dilution -- the company does not need future cash due to its high profitability and cash position
This company is growing every bit as fast as Crowdstrike and Cloudflare, but it is valued at 1/3 as much as Wingstop based on PE. While unprofitable growth companies present a major risk in this current market, buying profitable growth companies that have seen their valuations slashed 70%+ should prove to be a winning bet
Key Metrics:
Price/Earnings (FWD): ~18x
This is below the average PE ratio of the S&P 500, yet IS is growing over 10x faster than the 10-year avg. revenue growth rate of S&P 500 companies at 3.4%
Revenue growth: In Q4 IS grew 46% YoY
2021 growth came in at 67% YoY
99% of growth was organic, rather than via acquisitions like competitors
Anything above 30% growth YoY is considered high growth and traditionally worth a significant premium on a PE multiple basis
154% net revenue retention
This means that not only is their little to no churn within the user base, it means most customers are increasing how much they spend with IS each year... this explicitly illustrates how sticky and productive the platform is for its customers
36% adjusted EBITDA margin that is continuously growing as the company scales up
IS is dropping 36% of every dollar it earns down to EBITDA, which will allow it various options in the future, especially compared to other tech peers that are still burning piles of cash annually
IS is forecasting adjusted EBITDA margins to decline slightly to 31-34% in 2022 due to increased investments to build out their presence outside of mobile gaming -- management has proven it can effectively grow the company over the years, so we want them to do this!
Net cash position of $741 million means almost 20% of the company value is in cash on the balance sheet
Peers all have net debt balances due to expensive acquisitions to fuel their growth rates
Cash will allow IS to be aggressive in pursuit accretive acquisitions at depressed valuations in this market or continue to invest heavily in organic growth
The stock has fallen ~70% from its November highs despite continued growth and strong forward guidance
My Favorite Links
From folks much smarter than I....
- Case studies and quarterly metrics illustrate the continued growth of this company
- Strong analysis from a VC analyst who breaks down the tech offerings very well
- Provides an overview of the revenue structure IS has in place, ie how they earn money from their customers
- Great chart included where he spread the comps so one can get a better idea of how IS compares to peers across key metrics
- "Just for some context, like one customer of ironSource is Activision Blizzard. So Activision Blizzard is Call of Duty franchise. They just released a mobile version of that game, Candy Crush as well, with their King Digital part of Activision Blizzard. What they do is they have turned to ironSource. So they're ironSource's customer and ironSource is in charge of getting those games out there downloaded and monetized."
- Solid overview of all the things the company and overall sector has going for it
- Added to Wedbush's Best Ideas list and given $13 price target
- "Business fundamentals for the company remain strong, driven by its unique ability to analyze first-party, third-party, and device-level data in order to develop user acquisition and monetization solutions that resonate with app developers and telecom operators," Pachter wrote in a note to clients