AppLovin Likely Stock For Additional Estimate Revisions Ahead Of Courtesy Secular And Fundamental Pressures, Analyst Says

Benchmark analyst Mark Zgutowicz initiated coverage on AppLovin Corp APP with a Sell rating and a price target of $7.

The analyst turned cautious about AppLovin's near-term business fundamentals and long-term competitive positioning and expected additional meaningful estimate revisions ahead.

Near-term, Zgutowicz expects AppLovin's SPEC (software platform enterprise client) growth to stall meaningfully, beginning 1H23E against difficult LTM inorganic compares. 

In the intermediate to long-term, despite mobile gaming remaining a significant mix of consumer engagement, roughly a third of the total time spent on mobile devices, according to App Annie, ad platforms without a bedrock of 1P data will see monetization of this engagement steadily decline.

While management's desire to divest its Apps (mobile games portfolio) division is well understood, the inherent business model risks of not having a 1P data advantage are underappreciated, in Zgutowicz's view. 

Ad platforms, including AppLovin, that lack 1P competitive differentiation will revert to mean returns as Apple Inc AAPL iOS and Android restrict 3P data access and targeting. 

This weak competitive position leaves unknown Apps segment potholes ahead and, perhaps more critical, Software Platform efficacy and return risks. 

Further, the company's non-transparent trailing ~$4 billion inorganic investments add to its near and long-term risk profile. 

Zgutowicz expects Apple to formally ban iOS probabilistic and fingerprinting practices in the next 6-9 months, negatively impacting APP's mediation (MAX) platform efficacy and returns beyond the permanent IDFA impacts management quantified. 

The analyst expects the introduction of IDFA-like restrictions on Android, vis-à-vis deprecation of GAID (Google Advertising ID), in late 23-early '24, adding untenable weight to existing MAX efficacy and return weight from Apple. 

Expect considerable mobile game ad spend compression in '23E and beyond, led by consolidation to fewer and financially stronger game developers as the economic environment and permanent industry (iOS) ROAS destruction punishes low-mid tier developer P&Ls. 

Recent insider sales are noteworthy, including by CEO and CTO. 

Price Action: APP shares traded lower by 8.53% at $9.97 on the last check Thursday.