The Ratings Game: AppLovin stock posts best one-day gain as company weighs selling apps business, Wall Street applauds strategic shift

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AppLovin Inc. shares soared Thursday for their best one-day gain after Wall Street supported the app-monetization company’s plan to shift focus to its higher-margin software business and treat its lower-margin app segment like a standalone business, parts of which it could sell following a strategic evaluation.

AppLovin
APP,
+34.68%

shares climbed as much as 46% to an intraday high of $39.86 Thursday, and finished up 35% at $36.74 for their largest one-day percentage gain since going public a little more than a year ago. Shares, however, are still 30% below levels seen 12 months ago, compared with a 3.3% decline in the S&P 500 index
SPX,
-0.13%

and a 12.7% fall in the tech-heavy Nasdaq Composite Index
COMP,
+0.06%
.

Late Wednesday, the company announced the new strategy during its quarterly results. While placing more of a focus on the software business may have reduced the company’s revenue forecast, the higher margins of the business boosted its profitability forecast. The Palo Alto, Calif.-based company not only offers marketing, monetization and analytics software that helps app developers grow their businesses, but also owns a portfolio of more than 200 free-to-play mobile games.

Morgan Stanley analyst Matthew Cost, who has an in-line rating and a $70 price target, said the company’s app portfolio “has reached a critical mass that should allow AppLovin to collect data/drive insights with much more limited investment, going forward.”

“We are fundamentally bullish on this development, as we believe this increased focus on the highly profitable and fast-growing ad network business will continue to drive cash flow growth and that multiple investors are willing to pay for APP,” Cost said.

The type of data collected to use in powering ad software was the flawed linchpin in the previous day’s report from Unity Software Inc. 
U,
+15.81%

Late Tuesday, Unity revealed a flaw in its ad-targeting tool, which used inaccurate data from an end user, and the company’s stock shed more than a third of its value in Wednesday trading. On Thursday, Unity shares recovered somewhat and closed up 16%.

BTIG analyst Clark Lampen, who has a buy rating and reduced his price target to $60 from $103, said the big decision by AppLovin was to adjust the operating strategy for the apps business “for positive margin performance (+5-10%), which lifts’22/23 EBITDA forecasts, despite lower total revenue.”

That, in turn, gives AppLovin the “flexibility for investment elsewhere as the company pursues/progresses against opportunities to broaden the software [total addressable market],” Lampen said.

AppLovin’s strategy shift comes after a year of acquisitions following the company’s initial public offering in April 2021. This past April, AppLovin acquired streaming-video company Wurl for $430 million in cash and stock, following its $1.05 billion acquisition of app-monetization company MoPub, which closed on Jan. 3, and its year-ago $1 billion acquisition of German mobile-app measurement and marketing company Adjust.

Read: AppLovin IPO: 5 things to know about the software company valued at nearly $30 billion

Oppenheimer analyst Martin Yang, who has an outperform rating and a $74 price target, said that AppLovin is “evolving at extraordinary speed.”

“After setting lower growth expectation for 1P games (Apps) in 4Q21, AppLovin management made another leap forward in 1Q22 to de-emphasize games,” Yang said. “This time, APP states that 1P games will no longer be operated as a strategically integrated assets—they will be reviewed based on their financial contribution and could be restructured or even sold.”

“This signals an 180-degree turn from the ‘Strategic Flywheel’ argument for integrating APPs to Software Platforms at APP’s IPO barely a year ago,” Yang said. “While we have reservations on how effective APP can stay without 1P games, its recent results clearly showed Software can maintain momentum despite declines in Apps.”

Truist analyst Youssef Squali, who has a buy rating and lowered his price target to $77 from $90, called the quarter and outlook “noisy” but said the “mix shift should lead to higher quality revenue and higher margins.”

“We find the strategic rationale to operate the Apps segment as a standalone business (potentially sell non-profitable assets) and optimize for its SaaS offering as sensible considering the outsized success the company is seeing in its Software segment,” Squali said. “Continuing to invest in the Apps business at this point would likely result in diminishing returns for the overall business.”

Of the 16 analysts who cover AppLovin, 15 have buy ratings and one has a hold rating. Of those, seven lowered their price targets resulting in an average $75.73, compared with a previous $89.00, according to FactSet data.

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