ironSource Stock: Unjustified Sell-Off Presents a Solid Opportunity
Stock Analysis & Ideas

ironSource Stock: Unjustified Sell-Off Presents a Solid Opportunity

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ironSource went public via a SPAC in 2021. This has caused its stock to get grouped with all the other SPAC stocks, most of which are low-tier companies that have declined substantially in the past year. However, although ironSource is over 80% off its highs, it’s not like many of the other profitless SPACs. It has high growth, profitability, and a low valuation, thus presenting an interesting opportunity. Not to mention, its strong balance sheet also offers a unique opportunity in the current market environment.

ironSource (IS) is a software company that excites me because it has been undeservingly caught up in 2022’s bear market. It is down about 70% year-to-date, and over 80% off its all-time highs.

Because of this, the stock is trading at a valuation that is too cheap to ignore. This is despite ironSource being a highly-profitable growth company with long-term tailwinds and a flawless balance sheet. We, the authors, are bullish on ironSource stock.

Israel-based ironSource is a business platform that helps mobile content creators thrive within the app economy – mainly with games. Its mission is to “help developers turn their apps into scalable, successful businesses.”

Nowadays, making apps and games is relatively easy; there’s an app for everything. However, that also means there’s more competition now on the business side of things, which is where ironSource comes in. Let’s look into ironSource’s financial statements to see what makes the stock worth considering.

High Growth and Profitability

As mentioned above, ironSource combines growth and profitability – and lots of it. The company’s revenue was $181.1 million in Fiscal 2019 and recently reached $623.4 million for the trailing twelve months, a 244% increase in just over two years.

More recently, in Q1, ironSource’s revenue grew 58% year-over-year to about $190 for the quarter, more than 2019’s entire revenue figure. Its free cash flow has grown as well – although not at the same rate. FCF grew from $116.4 million in Fiscal 2019 to $151 in the past 12 months.

While it isn’t ideal that free cash flow growth hasn’t kept up with revenue growth, it likely isn’t a cause for concern because it just means that the company has been investing more in its growth. In fact, its gross profit margin has slightly increased over the past few years, going from 80.9% in 2019 to 83.9% in 2021.

Therefore, with its high gross margin, it has lots of room for profitability. All ironSource would have to do is cut some of its growth investments, and boom, its profitability would jump.

However, it doesn’t need to do that because it is already highly profitable, and extra growth will create more value. Also, the fact that it can maintain high growth while achieving a 24.2% FCF margin (for the last 12 months) is quite impressive.

Plenty of high-growth companies incur heavy losses. The company also had a 31% EBITDA margin in Q1 and expects a long-term EBITDA margin in the mid-40% range.

ironSource and its Market are Still Projected to Grow

While ironSource is expecting a slowdown in growth due to macro headwinds, the overall trajectory is still higher in the long term. Some may be turned off by the company’s revenue guidance of $180-$185 million for Q2, implying solid year-over-year revenue growth of 33%-37% but a quarter-over-quarter decline of 2.5%-5%.

As far back as the data goes (2019), IS’s revenue was growing consistently on a quarter-over-quarter basis, so this would mark an end to that trend.

However, sequential growth should eventually continue, as the company’s full-year 2022 revenue guidance is $750-$780 million, implying 36%-41% year-over-year growth.

Notably, for the full year, the company expects its EBITDA to range between $230-$240 million and EBITDA margins between 29%-32%. Furthermore, ironSource can grow organically, as the mobile apps market is expected to grow at a 20.65% CAGR between 2022 and 2025, according to an August 2021 research report from technavio.

Although the research report came out before macro headwinds got bad, it’s still likely that the app economy will grow by a double-digit percentage over the next few years.

ironSource can also grow via acquisitions, as it has in the past. In the last 12 months, ironSource spent $411.8 million on acquisitions. Considering that its market cap is $2.35 billion, that’s big. With its pristine balance sheet, which we will talk about next, it can acquire many more companies at today’s discounted prices.

ironSource’s Flawless Balance Sheet is its Advantage

ironSource has plenty of cash on hand. The company has $441.2 million in cash and no debt. At its current market cap, its cash position makes up 18.8% of its market cap, which is impressive, to say the least.

During a bear market, this is a huge advantage for ironSource for two reasons. First, it can choose to repurchase its shares at a relatively low price – although I don’t think management has any plans of buying back stock.

Second, ironSource can use its cash to acquire companies at low, bear-market prices, which is a great strategy if executed correctly. Nonetheless, even if it doesn’t use its cash balance, you can rest assured that its profitability and balance sheet will shield it from a recession.

Valuation: Inexpensive for a High-Growth Tech Stock

ironSource shares appear undervalued. According to guidance issued two months ago, management expects IS to have 1.15 billion shares outstanding for Q2 2022, implying some share dilution, which is expected from tech companies that pay employees with shares.

At the current share price of about $2.30, this implies a fully-diluted market cap of $2.65 billion. Analysts expect IS to generate $175.5 million in free cash flow for 2022. If this is achieved, its forward price/FCF multiple for 2022 would be about 15x, which is cheap for a high-growth company.

Its multiple is even more affordable if you remove its large cash position from its market cap, giving you a fully-diluted market cap of $2.2 billion and a forward multiple of 12.6x. This is cheaper than many low-growth stocks.

Wall Street’s Take on ironSource Stock

Turning to Wall Street, analysts seem to agree with our sentiment. IS stock has a Strong Buy consensus rating based on 11 Buys and one Hold assigned in the past three months.

At $5.75, the average ironSource price target implies 150% upside potential. Analyst price targets range from a low of $3.50 to a high of $13.

Conclusion – Growth at a Great Price

As stated above, ironSource is a high-quality growth stock that appears to be undervalued – but why is it trading at such a low price? Is there something wrong with the business?

We don’t think there’s much wrong with ironSource, but here’s the thing that might have thrown off investors: it was one of many companies that went public through a special purpose acquisition company (SPAC) merger in 2021.

Many SPACs that emerged last year were low-quality, unprofitable companies, causing people to view SPACs negatively. Perhaps, this is why ironSource has seen such massive selling pressure; it may be seen as just another SPAC that is down over 80%.

Nonetheless, that’s what has created this opportunity to purchase the stock at what seems to be a bargain price. The numbers speak for themselves, and analysts agree with our sentiment.

Therefore, we believe IS stock is one to consider for the long term.



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