AppLovin Is Vulnerable To Hyper-Casual Headwinds, Further Hampered By Google's Ad Restrictions, Analyst Says

  • Benchmark analyst Mark Zgutowicz reiterated Sell on AppLovin Corp APP with a $7.00 price target.
  • The consensus does not reflect ’23 hyper-casual secular headwinds, setting up for a challenging 1Q and CY23 guidance.
  • Specifically, the analyst believes ’23E consensus revenue grossly overstates existing and net new SPEC organic growth potential, the latter of which is tapped out as both Apple Inc AAPL and Alphabet Inc GOOG GOOGL Google ad restrictions have ended the life of low-end app developers, APP’s target market. 
  • Further, while management’s desire to divest its Apps division is well understood and business model risks of not having 1P data differentiation are meaningfully underappreciated. 
  • Tencent Holdings Ltd TCEHY-owned gaming studio, Voodoo recently announced its ambitions to divest from hyper-casual, and its head of publishing, Alex Shea, went as far as to suggest, “Hypercasual is dead.” 
  • Voodoo Studio assets average ~300M MAUs and 6B downloads per month as hyper-casual fueled its historical success. 
  • Its decision to reinvest away from hyper-casual and towards casual/mid-core/web3 is consistent with APP’s decision to divest its studio assets. 
  • APP-owned properties have become less competitive on App Store and Google Play store rankings, and it was unable to launch a successful new title in ’22. 
  • Google’s September ’22 ad placement restrictions have caused a material deceleration in App-segment revenue. 
  • Android over-exposure is likely to impede growth further, the analyst noted.
  • The analyst expects material resets in consensus estimates post-4Q results, more accurately reflecting these secular headwinds that do not lap until September ’23.
  • Price Action: APP shares traded lower by 5.18% at $12.54 on the last check Monday.
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