Wells Fargo Initiates Coverage on AppLovin (NASDAQ:APP)

Wells Fargo has initiated research coverage on AppLovin with an Overweight rating and a price target of $200, highlighting a positive outlook for market share and software revenue growth.

Market Position

The analyst draws parallels between AppLovin’s standing in mobile games and Google’s dominance in programmatic advertising post its 2008 acquisition of DoubleClick. AppLovin is expected to continue capturing market share and exceeding revenue forecasts in the $34 billion sector.

Share Performance

Following the news, AppLovin’s stock rose over 1% on Tuesday.

Revenue Growth Forecast

The analysis indicates that the mobile game user acquisition market has the potential for AppLovin to experience a 20-30% compound annual growth rate (CAGR) in software revenue through 2027. With projected spending on user acquisition reaching $34 billion in 2024, AppLovin is anticipated to represent $9.4 billion of this, securing a 28% market share.

Analyst Alec Brondolo noted, “Assuming the market grows ~5% / year, we believe this suggests APP could grow ~25% through '27 without reaching 50% share.”

Impact of Axon 2.0 Release

The launch of Axon 2.0, a new engine for AppDiscovery in the second quarter of 2023, has been pivotal in driving performance, with software revenues skyrocketing from 8% year-over-year to 75% in the second quarter of 2024.

Brondolo attributes part of AppLovin's advantage to its substantial 60% market share in mediation, bolstering its return on advertising spend (ROAS) compared to competitors.

Strategic Comparisons

Wells Fargo regards AppLovin's position in the mobile game user acquisition space as structurally akin to Google’s situation in programmatic advertising after acquiring DoubleClick. The acquisition of MoPub in 2021 has further strengthened AppLovin's offerings in mediation, software development kits, and user acquisition.

Risks and Challenges

However, Brondolo cautioned about potential risks, especially concerning AppLovin’s role in the eCommerce advertising space, where significant hurdles are anticipated.

“We are skeptical mobile game ad inventory converts well for eComm, so APP has to find non-gaming publishers, in our view,” he stated. Additionally, he suggested that AppLovin must expand its sales force and improve its data capabilities in eCommerce compared to its existing strengths in mobile games.