Is ironSource a Buy Under $10?

Israel-based ironSource Ltd. (IS) operates a business platform for app developers and telecom operators. The app economy platform IS began trading on the New York Stock Exchange on June 29 after closing its merger with a blank-check company backed by U.S. private equity firm Thoma Bravo. The deal provided the company with $2.15 billion in cash, including  $1.3 billion in private investment in public equity (PIPE) funding. 

The company topped analysts’ revenue expectations in its most recent quarter. Furthermore, IS also raised its full-year guidance and provided a fourth-quarter outlook. Its total revenue for the full year is expected to be in the range of $535 - $540 million, versus the prior estimate of $510 - $520 million. And for the current quarter, IS expects its total revenue to be between $140 - $145 million, indicating a growth rate of 29% - 34%.

The company has also announced its agreements to acquire marketing software company Bidalgo, and the mobile advertising and app monetization company Tapjoy, Inc, which should enhance its portfolio and help IS grow over the long term. However, the company’s stretched valuation could be a concern and could cause its shares to retreat. IS has slumped 19% in price over the past six months and 15.8% over the past month to close yesterday’s trading session at $8.08. The stock is currently trading below its 50-day and 200-day moving averages.

Here is what could shape IS’ performance in the near term:

Stretched Valuation

In terms of forward EV/Sales, IS is currently trading at 13.02x, which is 222% higher than the 4.04x industry average. Also, its 124.31x forward P/E is 312.6% higher than the 30.13x industry average. IS’ 15.19x forward Price/Sales is 274.2% higher than the 4.06x industry average.

Acquisitions

In October, IS announced that it entered an agreement to acquire Bidalgo. By leveraging IS’ current creative management solution, Luna Labs, this acquisition should enable the company to offer a wider spectrum of marketing-focused products and provide app marketers an end-to-end solution for their entire marketing operation in one place. IS also announced its agreement to acquire Tapjoy, Inc. IS expects this acquisition to strengthen its platform offering for mobile app and game developers through several areas of synergy. These acquisitions should help the company drive long-term growth.

Mixed Financials

IS’ revenues increased 59.6% year-over-year to $140.45 million in its fiscal third quarter, ended September 30. Its gross profit came in at $118.69 million, indicating a 63.5% year-over-year increase. However, its income from operations declined marginally from the same period last year to $23.40 million. Its total cost of revenue grew 41.1% from its  year-ago value to $21.76 million. And its  net income stood at $15.77 million, down 30.2% from its prior-year quarter.

POWR Ratings Reflect Uncertain Prospects

IS has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Value, consistent with its lofty valuation.

IS has a C grade for Stability. Its 60-month beta of 0.94 justifies this grade.

Of the 169 stocks in the Software - Application industry, IS is ranked #67.

Beyond what I have stated above, one can also view IS’ grades for Quality, Growth, Momentum, and Sentiment here.

View the top-rated stocks in the Software – Application industry here.

Click here to check out our Software Industry Report Bottom Line

IS shares have slumped in price over the past month, but the stock still looks overvalued at its current price level. Furthermore, the company’s top-line growth did not translate to bottom-line improvement in its most recent quarter. And although the company’s recent acquisition plans are expected to help it grow, its near-term prospects look uncertain. Thus, we think it could be wise to wait for a better entry point in the stock.

How Does ironSource Ltd. (IS) Stack Up Against its Peers?

While IS has an overall POWR Rating of C, one might want to consider looking at its industry peers, Open Text Corporation (OTEX), Progress Software Corporation (PRGS), and Commvault Systems, Inc. (CVLT), which have an A (Strong Buy) rating.

IS shares were trading at $8.10 per share on Wednesday morning, up $0.02 (+0.25%). Year-to-date, IS has declined -26.36%, versus a 25.58% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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