Initiation of coverage Adverty: Hidden values about to be revealed

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Equity research, Adverty

Adverty has developed an in-game advertising solution for game developers. With a patented method for determining the visibility of ads in 3D games, the company is well-positioned when demand takes off. Carlsquare Equity Research initiates coverage on Adverty with a fair value of SEK 4.9 per share for the next 6-12 months.

In-game ads, an upcoming revenue source for game developers

Advertising is one of the most common revenue models for mobile games. Adverty’s solution enables game developers to generate revenue from in-game ads for games mainly on mobile platforms, AR, VR and MR. In-game ads are integrated as part of the game environment, for example, via billboards in a sports game. Compared to traditional banners and interstitial ads, in-game ads are considered less disruptive to the gaming experience. This feature is beneficial for both advertisers and game developers.

Rising demand for in-game ads and a hidden value in technology

In parallel, the in-game ads market is still in its infancy but is expected to multiply in the coming years, given the large audience that exists in the gaming world. That has also made the company’s market highly competitive. In our view, a prominent growth driver is the new guidelines for in-game ads in 3D games developed by the industry body Interactive Advertising Bureaus (IAB). This help to clarify the value of in-game ads. We believe this will drive demand, the market and the company’s continued growth.

According to the IAB’s guidelines, several criteria must be met for an ad to be classified as viewable, create value and thus trigger a payment from the advertiser. Adverty’s method for measuring whether an in-game ad in 3D games is viewable (in line with the IAB guidelines) is patented – and could close out the competition. However, as an external part, it isn’t easy to assess the strength of the patent. But patents are an asset that may take the company to a leading position in the market.

Low valuation, given growth and profitability potential

In 2022, the number of games on the platform almost doubled to around 250. For 2022, we anticipate revenues to increase by 195 per cent to SEK 14.1 million. We expect a continued rapid growth rate over the coming years – a CAGR, 2021-2025 of 146 per cent. In parallel, with a scalable platform, we expect gross margin to rise quickly and normalise at 40 per cent in 2025, the same year a positive EBITDA result is anticipated. Over time, we expect the EBITDA margin to increase to 14.4 per cent. If the strength and value of the patents can be made clear, a significant upside in our forecasts and valuation is created.

Combining a DCF model with multiple valuations, a fair value of SEK 4.9 per share is calculated for the next 6-12 months. Our valuation corresponds to an EV/Sales multiple of 2023 of 4.6x and a valuation multiple on expected sales, adjusted for revenue sharing (50 per cent) 2024, of 4.1x. The reference group, consisting of companies in Adtech, is currently trading at an EV/Sales multiple 2023 of 3.8x.

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