What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing a few days ago, we made a video about chinese video game live streaming company huia. We can tell from the like ratio and comments that a lot of you guys don't like chinese talks, and there is good reason to be skeptical with the communist party in full crackdown mode. Many companies face significant regulatory risk. The country's private education stocks are continuing to bleed out, as the government is considering banning profits, which would effectively wipe out the industry.

Dd is also continuing its nosedive with shares now down more than 50 from its ipo just a few weeks ago. Even stocks, not directly impacted by the recent crackdowns, are suffering from broad market sell-off. Huya is down close to 20 over the past five days, despite no company-specific news in this video we're going to look at a us-based stock which, in our view, also has tremendous upside with far less risk. It's a video game stock that benefits from the secular growth around the mobile gaming industry.

Before we get into the video, keep in mind that we are not financial advisors and this video is, for entertainment purposes, only make sure to do your own research and consult with a professional before making any investment decision. The stock we're talking about today is sciplay which trades under the ticker symbol, scpl based in nevada sciplay, is a leading developer of mobile gambling games. Their games offer free to play slot machines. You don't deposit real money into the game and you can't win any real money either they make money by selling virtual coins to people in the game, while playing a virtual slot machine with no real money on the line seems dumb.

These games are surprisingly popular. Their top game jackpot party casino has close to 1 million reviews on the google play store with overwhelmingly positive ratings. In 2020, 7.1 percent of their users bought in-app purchases, with the average paying user spending 92.75 cents per month. On the app it's pretty shocking that people are willing to spend so much money on these games, but it's a great business model for sciplay at a real casino.

The odds are only slightly tilted in the house's favor. Sometimes the gambler wins and the casino has to give them a real payout, but for sciplay the odds are 100 rigged in their favor. Users can only deposit money into the game, but they can never take any real money out. Their revenue has been growing strongly over the past few years.

In 2017, they generated 361 million dollars of revenue in 2020 that increased 61 percent to 582 million dollars. They benefited from the pandemic as people were forced to stay at home and had more time to play. Games many people who downloaded their games for the first time in 2020 will continue playing even now that the pandemic is over, so they get a long-term benefit from the pandemic. This is reflected in their first quarter, results with their revenue increased 28 percent year over year.

In three percent quarter over quarter, even as many parts of the economy were reopening most of the revenue growth has come from increased monetization. Their monthly active users is represented by this blue line. It has been pretty stagnant, fluctuating around 8 million, but their conversion rate to paying users has been steadily increasing. The orange line represents the percentage of users who spend money on the games.

This has increased from 5.3 in 2017 to 7.1 percent in 2020.. The number of paying users has increased every year and reached 525 000 in 2020. Their average revenue per paying user has also been increasing. It reached a staggering 1108 dollars in 2020.

This shows how addicting these games are for some people of the people who spend money. The average spending is more than a thousand dollars per year. One of the ways that they increase revenue per user is with daily events, for example, in their goldfish game. They increase the average session time by 10 and average number of spins by 15.

Just by introducing new collectable features and events which drive engagement, they have teams of data scientists who constantly monitor user, behavior and manipulate the game, features to maximize the in-app purchases, while their portfolio of casino games are extremely profitable. They only appeal to a niche audience if they want to take their growth to the next level. They'll have to start developing mainstream non-gambling games. To this end, sciplay acquired, leading casual game developer come to play in june of 2020..

Come to play is the developer behind the popular mobile game. Solitaire pets, adventure, solitaire, pet's adventure is a spin on the card game solitaire. Where you play with and rescue pets. You win virtual coins within the game which allow you to advance to later stages.

They also have daily challenges which keep users hooked on the app similar to sci-place casino games. They use a freemium model where they monetize with in-app purchases similar to the slot machine games. Solitaire with pets has overwhelmingly positive reviews. The global video game industry grew to 178 billion dollars in 2020, while it is expected to pull back little in 2021 as the economy reopens and people go back outside, it will likely return to its strong growth trends and reach more than 200 billion dollars by 2023.

The fastest growing part of the industry is mobile. Games which are taking greater market share every year in 2021, mobile games are expected to make up 59 of total gaming revenue up from 46 just four years ago. Within mobile games. So-Called casual games are one of the fastest growing segments.

Casual games include games like flappy, bird or subway, surfers they're, simple, and anyone can start playing them almost immediately. These games are good for people with short attention spans. This is good because the average human has an attention span similar to that of a goldfish. With this recent acquisition, scyplay is pivoting their focus to the casual gaming market.

In addition to the acquisition of solitaire with pets, sciplay is also focusing on organic growth. They developed a new game studio called project x initiative which will build a pipeline of casual games for release in the second half of 2022. Their casino games generate tremendous amounts of cash which they can use to fund their new game developments. They currently have 272 million dollars of cash on their balance sheet with no long-term debt.

This gives them a tremendous war chest to fund future m a in organic development without needing to tap the debt or equity markets. Now, let's dig into the financials and see how much the stock should be worth. In 2020, they had 7.4 million monthly, active users or mau's by the end of 2021. We assume that this increases modestly to 7.5 million, and the percentage of paying users increases to 8 percent.

In 2020, they had average revenue per paying user of one thousand one hundred eight dollars, which was a big increase over 2019, as they collect more data and further improve their monetization. We conservatively estimate that this can grow in line with inflation or two percent per year. This means that their social casino revenue will grow to 734 million dollars by 2025.. The biggest wild card for sciplay is their project x initiative where they will develop new casual games to be released in 2022.

We assume that they can eventually grow this to 25 million users. Other companies in the casual gaming space, such as zynga make about 80 cents of annual revenue per monthly active user. We'll assume that cyble can do the same and generate 20 million dollars of revenue in 2025. I won't bore you by going through their income statement line by line, but we'll assume that their operating costs increase as they invest in project x initiative.

One important thing to note is that their parent company scientific games owns a 81.9 non-controlling interest inside play. You have to subtract this out to get the net income attributable to common shareholders, based on their 24.4 million fully distributed common shares outstanding. We estimate their earnings per share, will increase to one dollar and 47 cents by 2025., based on a conservative discount rate of 10 and a terminal growth rate of 3. We establish a price target of 24.39, which is 52 above the current share price of 16.

A share at the time of recording this video, so shares seem significantly undervalued, based on our assumptions. At its current price. Sciplay has a price to sales ratio of 3.5 times and priced an earnings ratio of 18 times to put this into perspective rival mobile game company zynga has a price to sales ratio of 5.7 times. They don't even have a price to earnings ratio because they lose money due to its low valuation.

Sciplay has a very low bar to beat expectations. This is a favorable setup and gives an opportunity for tremendous upside. There are two main risks to sci-play stock. Firstly, the reopening of the economy could decrease demand for mobile games in general, which could decrease their growth for 2021..

In our view, this risk is limited, given their strong financial performance in the first quarter. The second risk is that their foray into casual gaming turns out to be a flop and fails to generate any meaningful revenue or profits. Even if this happens, they have developed a strong portfolio of highly cash generative social casino games, which can support the stock's modest valuation. Even on their own, alright guys that wraps it up for this video.

What do you think about sciplay? Are there any other mobile gaming socks that you like better? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.