SciPlay (SCPL +0.00%) is a mobile gaming company that focuses on social casino games and casual games. The company got a massive boost from the coronavirus pandemic, which raised the demand for at-home entertainment in 2020, and it might be able to maintain its momentum thanks to some compelling industry trends and its rapid top-line expansion.
Let's dig deeper into these two reasons (and others) that explain why SciPlay stock might be a good stock to add to your portfolio.
1. Mobile gaming is a red-hot industry
Analysts at Global Data expect the mobile gaming industry to be worth $272 billion annually by 2030, expanding at a compound annual growth rate (CAGR) of 11% over the next nine years thanks to improving technologies and 5G network penetration.
Image source: Getty Images.
Within the industry, casual and hyper-casual games present a massive opportunity for game producers. Industry-wide, downloads of these simplified mobile apps grew 45% year over year in the first half of 2020, and are poised for continued expansion because they appeal to less-serious gamers who play on smartphones instead of dedicated hardware.
Las Vegas-based SciPlay is aiming to benefit from this industry growth. The company focuses on casino games designed to capture the "thrill and authenticity" of live gambling. This strategy differentiates the company from mobile gaming rivals and capitalizes on the excitement surrounding real stakes online gambling (which is gaining momentum due to legalization efforts across the country).
2. SciPlay is generating steady top-line expansion
First-quarter revenue jumped 28% year over year to $151 million, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased by 32% to $46 million. Some investors might be worried that SciPlay's growth will deaccelerate as the COVID-19 pandemic winds down. But the company's robust first-quarter results suggest these fears may be overblown.
The pandemic may have permanently boosted mobile gaming activity, and SciPlay is also taking steps to ensure its business keeps growing, no matter what happens to the rest of the industry.
In the first quarter, SciPlay began rolling out its latest game, Solitare Pets Adventure, which is expected to boost its footprint in casual gaming. The company also acquired Finland-based casual game developer KouKoi this month for an undisclosed sum, and it is building a brand new development studio called Project X that will launch in 2022.
What's behind the crazy low valuation?
With a market cap of just $400 million, SciPlay has a dirt-cheap valuation of just 0.66 times sales and 12 times forward earnings, which is mind-blowing for such a fast-growing business. The discount is probably because of SciPlay's unusual ownership structure. According to the company's first-quarter report, 86% of net income ($32.6 million) is attributable to SciPlay's former parent company Scientific Games Corp. (SGMS +7.30%), which spun off SciPlay in 2019. Scientific Games makes the electronic casino games and slot machines that many of SciPlay's mobile games are based on and the two companies have an agreement that allows SciPlay access to Scientific Games intellectual property rights to develop its mobile games.
On July 15, Scientific Games submitted a proposal to acquire the remaining equity (quoted as 19%) of SciPlay. This transaction would make SciPlay a wholly owned subsidiary of its former parent company. And according to Scientific Games, the acquisition would be "immediately accretive to the value to SciPlay shares," and shareholders will be offered a premium on the value of their investment.
SciPlay shares have already risen by around 11% following the news, and they could be poised for further upside if management agrees to the terms.
