AppLovin Faces Mixed Analyst Sentiments: AXON 2.0's Promising Growth Amidst Apple's Potential Challenge

Benchmark analyst Mark Zgutowicz maintained AppLovin Corp APP with a Sell and raised the price target from $17 to $22.

He continues to weigh the sustainability of near-term Software Platform (SP) momentum, specifically efficacy-led growth, and secular industry concerns, including Apple’s next shot across the MAX mediation bow with fingerprinting. 

Management credited most, if not all, recent SP momentum to AXON 2.0 efficacy improvements vs. macro lift, and he continue to assess the sustainability and magnitude of forward efficacy revenue momentum. He acknowledges that its mediation business is a competitive data play under developer confinements to MAX API. 

However, uncapped efficacy gains are questionable in an industry burdened with duplicative behavioral targeting. His big picture concern surrounds Apple Inc’s AAPL expanding interest in/outside attribution, or more specifically, its ads long game, to route traffic to a single (Apple) server. 

He expects FY23 revenue of $3.05 billion (prior $2.92 billion) and FY24 revenue of $3.11 billion (prior $2.93 billion).

Wedbush analyst Nick McKay maintained an Outperform and raised the price target from $37 to $48.

AppLovin’s positive momentum continued into Q223, with the rollout of its AXON 2.0 machine learning technology contributing to a record performance for the high-margin Software Platform business. 

At a high level, the technology has enabled more ad spend efficiency for customers (as promised), primarily mobile game developers for the time being, through enhanced targeting of transaction-based customers reflected by higher revenue per installation, which increased by 38% in the quarter. 

He expects Q323 to benefit from the first full quarter of AXON 2.0 contribution and views the guidance for the period within reach. Sequential Software Platform revenue growth of around 14% for Q2:23 was primarily a reflection of AXON 2.0. 

He remains optimistic about AppLovin’s opportunities to expand beyond its core market and into non-gaming verticals, helped by its new technology, which is not limited to mobile gaming applications, unlike its predecessor. 

Better ad spend outcomes will no longer restrict to mobile games in future years, and AppLovin has been able to attract a broader array of ad customers due to AXON 2.0’s advancements.

He expects FY23 revenue of $3.10 billion (prior $2.97 billion) and FY24 revenue of $3.60 billion (prior $3.35 billion).

Credit Suisse analyst Stephen Ju maintained an Outperform and raised the price target from $49 to $57.

The re-rating reflects operations in the fastest-growing segment in video games, software to offer more diversified exposure to mobile games, secular growth theme, and optionality to expand TAM to non-gaming apps. 

Outperformance on revenue and adjusted EBITDA vs. consensus was due to the software, which accelerated to grow 28% YOY and accounted for 54% of the revenue mix (vs. 2Q22 41%). 

The company launched Axon 2.0 in the quarter and, similar to its predecessor, helped drive the rising accuracy of ads to deliver higher ROAS. 

The design of Axon 2.0 to support the ad market more generally vs. just mobile games validates his thesis for expanding ad dollar TAM to the overall ad market. And as AppLovin continues to update and iterate, it should continue to drive ROAS improvement, and hence Axon 2.0 benefits should continue. And this benefit helped to drive Software Adj. EBITDA margin to 67%.

Price Action: APP shares closed higher by 26.50% to $37.20 on Thursday.