Companies In the Dog House 🐕

Pointerra Ltd (3DP.ASX) Airtasker Ltd (ART.ASX) Playside Studios Ltd (PLY.ASX)

I have a feeling that so far this year I’ve spent more time writing about companies who aren’t doing too well, but frankly, it seems that side of the scale outweighs the other. 

In that spirit, I thought I would put thoughts down on a few companies who are trading at, or near 52 week lows. These are companies I think still have potential. That said, very strong execution will be necessary to make progress, and some consistency in that execution will be necessary to change investor’s perception about them. 

That’s a big ask. In my opinion, the most common scenario is that they will likely fail to meet the market’s expectation of them, even if these expectations are low. Another way to say this is to remember Ian Cassel’s words: 

“Don't average down after a bad quarter. 90% of the time another one is coming right behind it. If conviction/trust is lost, sell immediately. If you still have conviction/trust let the position get smaller and if management executes it will naturally earn its way up again.”

A fantastic article that builds up on this statement is Matt Joass’ take on turnarounds, which he wrote about 5 years ago here: The Hidden Power of Inflection Points. 

With that preamble out of the way, let’s get into my commentary on these companies:

1. Pointerra Ltd (3DP.ASX)

2. Airtasker Ltd (ART.ASX)

3. Playside Studios Ltd (PLY.ASX)

As always, this is my opinion only, and will never constitute any form of advice. 

Pointerra Ltd (3DP.ASX) 🗺️

Point cloud software provider Pointerra had a truly shocking week. Only slightly over 1 month ago this was a A$160M market cap company. They now ended the week with a market cap of ~A$75M. Zooming out even further, the folly of the recent years once valued this company at near ~A$600M. I think that was simply ridiculous, even for a company with a lot of potential. 

So what happened? 

At a first level, we can partly explain the drop using Peter Lynch’s wise words: “Wall Street does not look kindly on fast growers that run out of stamina”. I think it’s fair to say that the same thing is true about Bridge St. 

This potential loss of stamina first showed up when Pointerra failed to provide the same graph they had for years at the time of quarterly’s. They omitted to mention where their ACV (ACV is short for annual contract value) was now at. More recently in the half-yearly commentary, all they could offer about this was: “ACV will be reaffirmed following completion of current annual renewal negotiations with key US energy utility customers; however, ACV is not expected to be lower than US$20.1 million as reported on 1 November 2022”. That’s hardly inspiring, and could indicate up to almost 6 months of flat-lining. 

Secondly, they failed to collect the cash we would have expected, burning near A$1M in the quarter (A$977k). This may have been acceptable otherwise, but considering all that remains in the bank is A$2.7M in cash, investors are starting to doubt Pointerra's plans for ‘continued organic growth’.

What’s more, the age-old challenge with Pointerra has always been the question mark about why it takes so long for them to recognise revenue? The ACV figures I mentioned above are in USD, so the AUD equivalent is ~A$29M in annual contract value. It’s fairly common for enterprise software to be roughly 1 year behind their ACV or ARR. This is normally accepted as the gap between the contract signed and the customer realising the value of the software. (Ie. signing a contract and receiving payment doesn’t mean you can count that as income. You haven’t earned the revenue until the customer has received the product. To earn a sale, you actually have to deliver what you promise.)

This size of this gap seemed a little too material for Pointerra; if all contracts were live, $29M divided in halves would result in A$14.5, whereas Pointerra reported revenue of A$3.8M. The >A$10M gap is worrying. 

Do all these worries justify valuing a previous consistent fast grower now close to 2x ACV? 

Well, I think the only good answer is that time will tell. If, as Pointerra noted “Continued growth in existing customer spend and new contract award expected during H2”  is achieved, then the market may have overreacted and become too narrow-term focused. 

I will keep my eyes peeled for the next quarterly result. 

Airtasker Ltd (ART.ASX) 🔨

Airtasker impressed no one with their beautiful slides and 57% revenue growth. 

Because, if we were going to look at growth, then we would want organic growth that factors out the Oneflare acquisition. As you can see on the slide, this came in at 23%. This in itself is pretty good, but the price to achieve this seemed significant at a high-level. 

A loss of A$7.7M is scary in this environment, even for a company with A$23M in the bank. 

The acquisition of Oneflare means AirTasker’s cost base is now inflated given more staff increasing. 

The interesting commentary was on parts of the costs which aren’t expected to scale over the future:

• “The Oneflare staff investment accounted for 47.8% of the movement against pcp. 

• The balance of the increase was due to the lower rate of capitalisation of platform development expenditure which was down 62.7% on pcp. The reduction reflected a change in process and the fact that the engineering and product teams invested more time in non-capitalisable activities during the half-year, including the new Airtasker branding.”

It seems questionable to invest so much in branding in this current environment, but it is true that the new website feels more user friendly and easier to navigate. 

For airtasker, monitoring future growth will be key to understand if there is indeed an added network effect value that came from Oneflare. 

What I like about them is the transparency in the announcements; they didn’t shy away from saying that the growth was in part due to a weaker comparison given last year was impacted by Covid. 

I was also pleased to see the CEO pictured on slides with users. This means the company may well have the mentality of talking to their users and improving the product on the right direction. That’s bonus points for me.

So let’s see what these guys can accomplish in future reporting periods. If growth continues and operating leverage starts to cross the chasm, then this may become a different type of company. 

Playside Studios (PLY.ASX) 🎮

In a similar fashion to Pointerra, only over 1 month ago, Playside was a company twice the size it is today in market cap. 

In a similar fashion to Airtasker, even 75% revenue growth wasn’t enough to buck the downwards trends in the stock for Playside. 

The game maker operates to work modes: they develop mobile games on a Work-for-Hire basis for external IP Owners, and their own, original games. 

Part of the reason for the punch in the stomach they’ve experienced is because for many, the interesting part of the business had always been their own original IP. After all, this is how the massive game makers (ie. Activision Blizzard, Electronic Arts Inc, etc..) became what they are today. In the quarterly report they announced weak results from their original IP game, and what looked like a pivot to prioritising WFH (Work For Hire). 

Another part of worry would come from the common large loss incurred of A$5M, a big move from what was nearly a flat margin 12 months ago. 

The good move Playside did was to raise a large amount of capital 12 months ago when the stock was worth roughly 3x as much, this gives them a remaining cushion of A$29M in cash. So cash isn’t a concern in the immediate term, but needs to be monitored still. 

We saw from the comments on the reported loss that the company has become bigger in employee size, and this increase in size has made it costly to operate. From their quarterly we can also see a significant jump in marketing spend. 

Playside is an interesting company for what it creates, and while video game revenue is not predictable like a B2B Saas business, there are unexpected upsides which can show up from time to time. The comments made from George the CEO on the results call illustrate this well:

“We’re also proud to reveal that the original Dumb Ways title experienced a viral resurgence, which saw it sit at #1 on the App Store charts in more than 30 countries for most of February so far. That was really due to the Dumb Ways theme song which went viral on social media platform TikTok in late January, with tens of thousands of users videoing themselves doing dumb things to the tune of the Dumb Ways to Die song. 

There was very, very broad engagement with our IP on social media, with some of the largest teen celebrities, famous sports and movie stars and pop culture icons all getting involved in the trend. For a ten-year-old brand to sit atop the US App Store charts for any period of time is huge (let alone the best part of a month), and we expect that will provide a nice revenue boost to the March quarter, at least 800k more than we originally forecast for the franchise in that period.” 

To me, Playside is a company to keep on your watchlist. Watching how the operational leverage might start to offer a better view on the types of margin they can reach as they grow will be interesting. 

Conclusion

The reporting season highlighted glimpses of what many investors feared; harder economic conditions yielding softer results. 

What’s interesting was the intensity of some investor actions on the back of some mixed results, it seems there’s a lot of focus to the next quarter, and a lot of focus on the bottom line. For investors that can see past the next quarter, there may be opportunities to be had. 

Best of luck out there. If you want me to cover a company, don’t be shy to ask.

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