ironSource: Sticky App Enablement Platform, But Growth Slows Looking Ahead

ironSource: Sticky App Enablement Platform, But Growth Slows Looking Ahead


The negative aspect facing investors is that ironSource’s growth rates are too volatile and looking out to early H1 2022, the company is up against tough comps.

On the other hand, ironSource has a very attractive business with strong expansion rates.

While paying 13x forward sales is not expensive, but investors will need clarity on ironSource’s prospective growth rates for 2022 to justify a higher premium.

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andresr/E+ via Getty Images Investment Thesis

ironSource ( IS ) is a mobile gaming app enablement platform. It drives app discovery and user growth for gaming platforms, with the end goal of increasing the monetization of gaming apps and analytics.

The main detraction here is that its revenue growth rates are highly volatile. That aside, the business model is very attractive, with high expansion rates.

On yet the other hand, I am unsure of whether paying 13x forward sales is all that compelling for this investor. Here’s why: ironSource’s Revenue Growth Rates Slow Down

Source: author’s calculations; **guidance

ironSource is expected to grow its revenues by at least 33% y/y for Q4 2021. As you can see above, Q4 2020 was a particularly strong period for ironSource, thus any comparison with last year was always going to struggle.

With that in mind, this obviously begs the next question, will ironSource struggle as it comes up against Q1 2021? Realistically, yes it will, but the more critical question to attempt to answer is what sort of sustainable growth rates should investors expect throughout 2022?

And that’s a tough challenge for investors. To illustrate, if you look back to earlier in 2021, ironSource was growing at nearly triple digits. Then, after Q1, its growth rates have been slowly decelerating, from mid 80s% y/y for Q2, to less than 40% y/y of revenue growth expected for Q4 2021.

Of course, getting confidence in ironSource’s sustainable revenue growth prospects is key to understanding what suitable multiple to assert on its stock. But I get ahead of myself. Let’s first understand what’s attractive about ironSource. Why ironSource?

ironSource helps developers turn their apps into scalable businesses. If you think about just how many apps are out there, it’s not that difficult to create an app. What is difficult is being able to monetize those apps.

Thus, in a nutshell, ironSource helps gaming app developers monetize and analyze their apps. ( Source )

As you can see above, gaming-focused creation platforms include Unity ( U ), Zynga ( ZNGA ) for game content, and ironSource for games infrastructure and product development. Understanding ironSource’s Business Model

As ironSource targets business enablement, ironSource has two business units, Sonic and Aura.

( Source )Sonic is aimed at developers, it improves app discovery and drives monetization of the app.( Source )What’s particularly attractive about this platform is that the success of the app also drives the success of ironSource, through its usage-based business model.Next, ironSource has its Aura business, that’s aimed at telecom operators. ( Source )The focus here is helping telcos participate in the app economy, by delivering relevant content to the phone’s owner.This side of the business is smaller than ironSource’s Sonic platform. The Auro business allows telcos a distribution channel to expand the adoption of content and promote telcos’ own content.( Source )Given the usage based business model it’s not difficult to see how ironSource’s net expansion rate is so high. As a reference point, typically anything about 110% is considered a high-quality business model. Thus, with that in mind, at 170% investors have a lot to be content with here. ironSource’s Profitability Profile is Very Attractive Furthermore, ironSource’s Q4 2021 guidance points to approximately 36% EBITDA margins, which is a nudge higher than its EBITDA margin for its trailing 9 months, which once again reflects this very high-quality business model. IS Stock Valuation – Attractively Priced It’s very difficult to get a clear sense of what ironSource’s revenue growth rates will be in 2022. Analysts presently expect 32% CAGR, but let’s assume that ironSource beats that and grows its revenues at somewhere between 35% and 40% CAGR. In that event, its revenues could reach $740 million in 2022. This would put its stock priced at approximately 13x forward sales. This is not bad if we consider just how sticky its platform is.Now, allow me to compare with its peer, Digital Turbine ( APPS ). Digital Turbine overlaps with […]

source ironSource: Sticky App Enablement Platform, But Growth Slows Looking Ahead

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