Investing.com -- Wells Fargo (NYSE:WFC) started research coverage of AppLovin (NASDAQ:APP) stock with an Overweight rating and a price target of $200, citing a favorable market share and software revenue growth outlook.
The firm’s analyst compares AppLovin's market position in mobile games to Google (NASDAQ:GOOGL)'s stance in programmatic advertising following its acquisition of DoubleClick in 2008. As such, they expect that AppLovin will continue to capture market share and outperform revenue estimates in the $34 billion sector.
The mobile technology firm’s shares rose more than 1% Tuesday.
Wells Fargo’s analysis suggests that the mobile game user acquisition market is expansive enough for AppLovin to achieve a 20-30% compound annual growth rate (CAGR) in software revenue through 2027.
With global mobile games, excluding China, projected to spend $34 billion on user acquisition in 2024, AppLovin is estimated to account for $9.4 billion of this expenditure, claiming a 28% market share.
“Assuming the market grows ~5% / year, we believe this suggests APP could grow ~25% through '27 w/out reaching 50% share,” analyst Alec Brondolo explained.
AppLovin's release of Axon 2.0, a new engine for AppDiscovery in the second quarter of 2023, has been a significant factor in the company's performance.
Following the release, software revenues surged from 8% year-over-year to 75% in the second quarter of 2024. Brondolo believes that AppLovin's leading position in mediation, with a roughly 60% share, has contributed to its sustainable return on advertising spend (ROAS) advantage over competitors.
The firm views AppLovin's strategic position in mobile game user acquisition as structurally similar to Google's in programmatic advertising post-DoubleClick acquisition. The acquisition of MoPub in 2021 has provided AppLovin with a dynamic similar to Google's, boasting strong products in mediation, software development kits, and user acquisition.
On the other hand, Brondolo also highlighted potential risks to its thesis, particularly regarding AppLovin's prospects in the eCommerce advertising market, citing significant headwinds ahead.
“We are skeptical mobile game ad inventory converts well for eComm, so APP has to find non-gaming publishers, in our view,” he wrote.
Moreover, the analyst believes that AppLovin needs to expand its salesforce and overcome its lack of data advantage in eCommerce compared to its strength in mobile games.