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ironSource Stock 10% Higher after Q2 Earnings; Here’s Why

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Despite mixed Q2-2022 results, ironSource stock finished the day 10% higher. The Unity Software merger deal is likely affecting ironSource’s price action.

Earlier today, ironSource (IS) reported its Q2-2022 earnings results. Revenue missed expectations while non-GAAP earnings came ahead of expectations. Despite the mixed results, ironSource finished 10% higher today. This may be due to Unity Software (U) stock being up about 10% on the day, as the recent all-stock merger deal between the two companies has made them highly correlated since the value of the merger increases as Unity’s stock price increases.

How Did ironSource Perform in Q2?

In Q2, ironSource’s revenue grew 35% year-over-year, coming in at $183 million and missing analyst expectations by just under $0.5 million. GAAP net income came in at $13 million. Non-GAAP earnings per share were $0.06, beating the consensus estimate of $0.03. However, GAAP earnings per share were just $0.01

The company’s adjusted EBITDA grew 22% year-over-year, reaching $56 million and representing a margin of 31%, in line with its Q1 margin but down from its 34% margin in the same period last year. Nonetheless, the company expects a long-term adjusted EBITDA margin in the mid-40% range.

A negative from IS’s Q2 results is its free cash flow figure of -$45.8 million, which doesn’t stack up well compared to a positive $12 million in the same period last year.

Also, ironSource’s dollar-based net expansion rate is still high, at 142%, but it has been downtrending since Q2 2021 when it was 181%. This metric shows how much a company has been able to expand its revenue base from existing customers due to upsells, add-ons, price increases, and the like. A figure over 100% is ideal since it means that a company is earning more from its past customers in the current period vs. the prior period. 

ironSource now has 446 customers that contributed more than $100,000 in revenue in the trailing 12 months. Last year, this number was just 309, and in Q1 of this year, it was 397.

The earnings report also states that the company’s merger with Unity Software is expected to close in Q4 of this year. However, AppLovin (APPannounced its intention to purchase Unity Software just yesterday, and if Unity accepts that deal, the ironSource merger will have to be ceased.

Is ironSource a Good Stock to Buy? Analysts Think So

Turning to Wall Street, ironSource has a Moderate Buy consensus rating based on seven Buys and five Holds assigned in the past three months. The average ironSource price target of $5.62 implies 21.3% upside potential. Price targets range from a low of $4.00 to a high of $13.00. With the stock currently at $4.64, the high price target implies about 280% upside potential.

TipRanks Investors are Very Bullish on ironSource

Out of the 552,359 portfolios tracked by TipRanks, only 0.1% hold IS stock. Nonetheless, in the last 30 days, the number of TipRanks portfolios holding ironSource stock increased by 7.9%. In the last seven days, this number increased by 0.4%. As a result, the stock’s sentiment is as high as it can be, demonstrated in the following image:

Conclusion: ironSource’s Q2 Results Were Mixed

ironSource had a good quarter on some fronts, experiencing high revenue and adjusted EBITDA growth. However, free cash flow came in negative, its dollar-based net expansion rate is declining, and earnings didn’t grow as fast as revenues. Non-GAAP EPS beat expectations, while revenue missed slightly.

Nonetheless, ironSource is a high-quality company with a long runway for profitable growth, as we talked about in a past article. It will be interesting to see if the Unity merger goes through or if AppLovin ends up buying Unity.

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