3 Big Winners From Google's Play Store Fee Cut

Following changes Apple, Inc. AAPL made to its App Store policies, Google parent company Alphabet, Inc. GOOG GOOGL has announced it will be cutting fees for app subscriptions sold in the Play Store from 30% to 15%.

On Friday, Bank of America analyst Justin Post said the change will have a “modest impact” on Alphabet’s top and bottom line, but could be a major earnings tailwind for internet subscription companies such as Match Group Inc MTCH, Duolingo Inc DUOL and Peloton Interactive Inc PTON.

“With greater scrutiny, and subscription companies potentially now able to direct users to their own sites to transact, fee cut could be an attempt to keep a greater portion of subscription transaction sales activity on the Play Store, and deter new app stores from opening,” Post said.

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Of all the regulatory risks Alphabet is facing, Post said its Play Store policies pose the biggest risk for investors.

In 2019, Google reportedly generated $11.2 billion in mobile app store revenue and $8.5 billion in gross profit. Post estimates Play Store revenue of $16.3 billion in 2021 and $18.1 billion in 2022. Of that revenue, he estimates 75% comes from gaming.

Winners And Losers: Post estimates the new Play Store fee cuts could put about $2.05 in 2022 EPS at risk for Alphabet, or roughly 2% of his full-year EPS estimate.

Yet Post said the Play Store changes are great news for internet subscription companies, specifically Match, Duolingo and Peloton.

Post said the Play Store changes could boost Duolingo’s gross margins by more than 5%. In addition, Post estimates Match generates about 50% of its app revenues from the Play Store, suggesting the potential for significant margin upside.

How To Play It: Bank of America has the following ratings and price targets for the four stocks mentioned:

• Alphabet: Buy rating, $3,150 target.
• Match: Buy rating, $178 target.
• Duolingo: Buy rating, $200 target.
• Peloton: Buy rating, $138 target.

Benzinga’s Take: The proactive app store policy changes by Alphabet and Apple may be painful for investors in the near-term. However, there’s a good chance the two companies’ self-imposed changes are more shareholder-friendly than potential outside crackdowns by regulators.

Photo courtesy of Tinder.