Under the Radar Report

Why Playside Studios ltd asx: ply?

22 February 2022
Richard Hemming

Playside Studios Limited (ASX: PLY) has an interesting niche in one of the fastest growth industries on the planet: gaming.

Take advantage of small cap speed to diversify your share portfolio

I’m a big skiing fan and when I watched the giant slalom at Yanqing Alpine, it reminds that mistakes are okay when they’re on the steeper sections, because you’re at speed. When you make them on the flatter sections and going slower, you get punished.

In the same way, when a company operates in an industry experiencing exponential growth you can sometimes get away with errors.

Why PlaySide Studios limited?

That’s why we have been supporting the gaming company PlaySide Studios (PLY), an ASX small cap virtual reality gaming stock that has climbed from a share price of 27 cents in July 2021 to a current share price for PLY of over $1. (dividend yield 0%). It's current market cap is $441m.

PLY-Share-price-2.png

Interesting operating niche

Playside Studios Ltd (ASX: PLY) has an interesting niche in one of the fastest growth industries on the planet. This company is doing deals with industry gorillas, which includes those in the crypto/ metaverse, established game developing giants and a wide range of entertainment giants and major hollywood studios like Disney. All in a US$180bn industry that is growing. The group is building an impressive niche through a combination of contract work and establishing its own IP.

The rapid monetisation of the newly acquired Dumb Ways To Die intellectual property, by creating unique digital assets attached to a proprietary crypto token issue for cash, is exciting.

PLY’s second quarter results

The company's results continued its strong revenue growth ($5.3m, up 71% over the pcp, and up 33% over the prior quarter) as well as mildly positive operating cashflow. 

Financial performance

PlaySide Studios has impressed from a financial standpoint, capturing value quickly, which has translated to the stock’s return of almost 50% in a couple of months, since we tipped it late last year (16 Dec 2021 / Issue 477).

Corporate overview

PlaySide is one of Australia’s largest independent video game developers, with titles across a range of categories including self-published games based on original intellectual property (IP) and games developed in conjunction with the worlds’ largest studios such as Disney, Warner Bros and Nickelodeon.

PlaySide is based in Melbourne, Australia and has a team of over 70 games creators and other staff. The Company’s portfolio consists of 52 titles delivered across 4 platforms: Mobile, Virtual Reality (VR), Augmented Reality (AR) and PC.

Gaming grown 20% a year

The past performance over the last six years has shown mobile gaming has grown almost 20% a year, almost double the pace of the overall gaming industry, and is estimated to be worth about US$180bn (A$250bn) in terms of annual spend.

Mobile games is close to half the total industry spend reflecting opportunities for monetisation within games, and this is where PLY got its start.

Management team

The company is lead by CEO and managing director 34 year old Gerry Sakkas, a one-time disgruntled game developer, who caught the attention of gorillas like Disney early on with an innovative phone game. The most recent deal has involved crypto and NFTs and what stood out was the fast cash flow generation.

Future growth

PLY climbed 30% on one day last week after announcing its proprietary Dumb Ways To Die franchise had instantly generated $8.4m cash from the sale (or “minting” to use an NFT crypto term) of “BEANS” – electronically generated digital content. This digital content is designed to interact with the associated free mobile game to enhance the experience.

Diversify your share portfolio

Back to the bigger picture, and it is true that right now there is market risk. It is also true that it’s not possible to base your investment decisions on what an ex-KGB officer might or might not do on any given day, when in control of 130,000 troops on the Russian/Ukraine border.

What you can control is that your portfolio contains stocks that can produce positive returns, no matter what the Minsk agreement says (or does not say).

Cash flow is king for investors

Stock market investors base their decision on cash flows well into the future. Another way of putting it is that stocks are longer duration assets than bonds. Most government bonds are 10 years. In equities, you are effectively buying a stream of cash flow, which might include dividends, into perpetuity.

What you’re looking for from small caps like PlaySide is evidence that they aren’t highly correlated to the market. This is what delivers you the most powerful diversification benefits.

Why does diversification matter?

In the Australian context, it’s a particularly concentrated market, being highly leveraged to the performance of a small number of large miners and banks. You don’t want all your eggs in two baskets!

Stocks with cash

You don’t need to go for fast high risk gaming stocks to find these kinds of companies that don’t have high market correlation. Some stocks in the value category have really been whacked by Covid. What is also obvious is the amount of fat some companies have in the form of cash, a legacy of booming markets.

Trading gains: Helloworld Travel (HLO)

We started to get interested in Helloworld Travel (HLO) after a traumatic 2020, when the company was supported by an emergency $50m rights issue at $1.65. These are the types of stocks you can make trading gains from, but there are also long-term opportunities to surf the trend back to normality.

Big Earnings Growth

Our view was and is that you can’t stay locked down forever. There has been great value on offer and that is largely irrespective of where the market is at any point in time.

Growth stocks

These stocks will not only achieve big earnings growth from their industries, but also from a release of pent up demand and the they have survived where many smaller operators have not. Even including significant bouts of weakness owing to uncertainty relating to the Omicron variant, at just under $2.60, Helloworld Travel (ASX: HLO) is up 55% on its capital raise levels.

After the 2021 IPO deluge and with rising interest rates there have never been more small caps to sort through. It’s like an episode of Survivor.

Stock picking is once again king.

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ABOUT THE AUTHOR

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.