While gambling and games are as old as human civilization, the past fifteen years have been a revolution in gaming for people all over the world. Playtika is able to leverage the computer everyone carries around in their pocket to democratize access to games.

This is just one company in particular on this month’s FA Alpha, a screen of the top 50 names from our Uniform Accounting database on growth, quality, and valuation metrics.

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Over the past 15 years, gambling has found a new medium through video games. Casino-style slot games, bingo, poker and card games, among many others are all over the app store.

A primary driver of this shift to mobile games is due to something that didn’t even exist 15 years ago—the smartphone.

People bring their phones everywhere these days, and companies have taken advantage of this. By developing far simpler but far more addictive games, it’s easy for people to be attached to their phones during their commute, while watching TV, or doing pretty much anything else.

This dependency on smartphones has opened the door for mobile gambling, whether that’s casino gambling or sports betting. Both of these have one thing in common, and that is it has made kings of a specific niche business.

Playtika (PLTK) is a company that makes casino-style “slot” games alongside more traditional mobile gaming, like solitaire and bingo.

Like other game makers such as Zynga (ZNGA), which recently got acquired by Take-Two (TTWO), Playtika monetizes upsell opportunities for its customers through its games.

These games are incredibly addictive. If you don’t believe us, look at Playtika’s profitability. We see that for every year Playtika has existed, its return on assets (“ROA”) has been above 50%. However, this is only half the story. To understand if the company is cheap or expensive, we should turn to valuations.

By using our Embedded Expectations Analysis (“EEA”) framework, we can see what investors expect Playtika to do at its current stock price.

But we know models with garbage-in assumptions based on distorted GAAP metrics only come out as garbage. Therefore, we use the current stock price with our EEA framework to determine what returns and asset growth the market expects today.

Analysts forecast this robust profitability to continue in 2022, alongside impressive asset growth of 35% and 56% in 2018 and 2019, respectively.

Yet everyone is so concerned about competitive pressures. But these competitive pressures have not been able to disrupt the company’s ability to have massive ROAs. The market expects returns to fall all of the way to 30% by 2025.

We see Playtika has taken advantage of the shift to smartphones and has made a killing by doing so.

Everyone’s skepticism is why Playtika trades at a low 11.7x Uniform P/E.

That is what makes Playtika such a compelling FA Alpha name. Its high returns, ability to grow, and low market expectations position it for significant upside.

This high-quality market leader in its industry is inexpensively priced and growing aggressively, which is why our FA Alpha Screen discovered the name.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click here.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research