Spring cleaning came early
Technology companies AppLovin and Niantic are getting rid of their gaming businesses. Why the conglomerate discount is a powerful broom and why $3.5 billion for one game is crazy - or isn't it?
Dear readers,
After a week of vacation (how dare I) that was hijacked by astonishingly resilient influenza viruses, we’re BACK. True to form for this year, a lot has happened in the past week. The good news: Germany’s election didn’t completely tilt to the far-right and the political establishment gets another four years to show that they can actually pass legislation that positively impacts its people. The bad news: it’s still 2025 (I guess that’s still good news, because we still have 10 months to turn this thing around and steer it into less crazy territory).
So, in the spirit of that as well as the fact spring cleaning came early in the world of business and entertainment, Freddie Mercury and Queen are the only appropriate musical interlude for this week’s post.
Did I mention I was born in the 80s? Anyway, you’re welcome.
Let’s dive into this week’s topic and start with a quick riddle.
What do a gambling company, and adtech platform, and an augmented reality software developer have in common?
They’re all trying to get the hell out of mobile gaming.
Aristocrat, AppLovin, and Niantic are all cleaning up their companies by refocusing on their respective core business and other avenues for growth by selling off their mobile gaming units. Aristocrat has already sold Plarium to Modern Times Group for $620 million. They’re still looking for takers for Product Madness and Big Fish Games. AppLovin wants to sell all of its gaming studios, including PeopleFun, Lion Studios, and Magic Tavern, for $900 million. And Niantic is looking to turn its crown jewel, Pokémon Go, into cash - $3.5 billion to be exact. Contrary to Aristocrat and AppLovin, Niantic seems to have a taker at hand: Savvy-backed Scopely.
Before we scrutinize each deal further, it begs the following question:
Why?
For starters, video games are a tough business. Big Fish Games hasn’t been able to release a new successful title in the past years. Niantic’s mobile game’s portfolio aside from Pokémon Go looks like a graveyard of expensive attempts to build a viable business (Monster Hunters is the closest thing to a legitimate successful title, but at 75M revenue it simply isn’t with it the distraction for the company at large).
Secondly, especially in the case of AppLovin and Niantic, games were never the end goal. They were a means to an end to serve a larger strategic objective, training wheels for the underlying technology that vastly benefit from gaming-related data. This is a story we’ve seen before. NVIDIA originally went into gaming because the requirements for graphics cards were the most demanding. Unity trained its engine in gaming and is now serving a vast array of industries with its ability to render immersive environments to train autonomous vehicles, doctors, pilots, and more. AppLovin has clearly stated on its last earnings call that the company will focus its advertising technology on e-commerce going forward, in addition to advertising for mobile gaming. So maybe it’s just timing that the in-house mobile games have served their purpose and it’s time to move on.
Then there’s a third factor at play, which I personally enjoy because it brings back fond memories of sitting in corporate finance lectures at university - the conglomerate discount.
“A conglomerate discount is when investors assign a lower value or discount to a conglomerate because divisions within the conglomerate are not performing well.”
To satisfy shareholders and continue to deliver shareholder return, companies have to focus their business on the most successful parts. The markets punish companies with too many different businesses by attributing the multiple of the shittiest business to the entire company - foregoing a lot of shareholder value because the far more lucrative businesses are devalued in the process and can’t live up to their potential.
Gaming stocks right now trade at revenue multiples of about 0.7-6.9x (that’s the range between Ubisoft and Take-Two). Software companies trade in the 7.9-14x range (that includes companies like Salesforce, Klaviyo, and HubSpot). If you drizzle a little bit of that AI fairy dust across your business, multiples are more in the 51-74 range (that’s Anthropic’s latest funding round valuation and Palantir.
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AppLovin’s stock popped by 28% the day it announced its latest earnings including the sale of its gaming assets. You can see where this is going…
Here’s the deal: at the end of the day, the markets are the adults in the room. AppLovin’s stock has been on an absolute tear, but this also set very high expectations for the company to keep going. Niantic, almost 15 years after being incubated inside of Google, at some point has to be gearing up for an IPO. A cleaner, focused business, presents a stronger equity story that will return more value to shareholders.
So where do all of these deals stand?
Let’s start with our friends down under, Aristocrat. People on the inside of the Plarium deal this week brought up an interesting fact to me: Product Madness and Big Fish Games were both utilizing the proprietary user acquisition and advertising platform that Plarium had built. That asset changed owners as part of the sale to MTG though. Supposedly, Product Madness and Big Fish Games have an extended period during which they can still utilize the technology, but they’re living on borrowed time.
That’s adding further downward pressure on the price Aristocrat is looking to realize from the sale. Back in 2017, they bought Big Fish for $990 million from Churchill Downs, and the Aussies would like to have their money back in full. Trouble is, Big Fish doesn’t seem to be nearly worth that amount anymore. The longer this selloff takes, the more the price will come down.
AppLovin on the other hand seems to be negotiating with an (for now) undisclosed buyer. It has signed a memorandum of understanding with a privately owned company to sell its mobile games business unit for $900 million - $500 million in cash, $400 million in buyer company stock. This latter detail is what makes this deal particularly intriguing, because it needs to be a buyer that is appealing enough to AppLovin to be interested in owning a piece of them, and it pretty much rules out a private equity player being involved here. That leaves…Moon Active?
And then there’s Niantic, which seems to pretty much have a deal in place with Scopely for its game Pokémon Go in return for $3.5 billion. Yes, you read that right. I have a hard time seeing how Scopely isn’t absolutely fleezed here and dramatically overpaying. Estimates still have Pokémon Go making roughly $500 million in annual revenue, sure. But: it hasn’t been growing in years, and Scopely isn’t known for AR, geolocation-based games. A revenue multiple of 7x for this game alone is crazy - especially when you compare that to the revenue multiple MTG paid for Plarium, which was a bit more than 1x.
So there has to be something here that we don’t know yet. Two things come to my mind:
1) Scopely is able to buy access to the Pokémon IP as a part of this and license the IP for other games as well.
2) Scopely has other IP licenses teed up that it wants to bring into the Pokémon Go / geolocation-based gaming world, either to enrich the current game with more brands, or to replicate the game and create more “Brand X” Go games.
At $3.5 billion, there needs to be a stronger strategic rationale than the emotional hunt for a trophy and putting the Pokémon Go deal plaque on your desk if you’re the Scopely and Savvy executive team.
We’ll need a bit more patience to see how all this shakes out. AppLovin has clearly said that they want to see a deal done in Q1, and it seems like Niantic is close as well.
One thing is clear: the cards in the mobile gaming world order are being reshuffled in 2025.