By Wallace Witkowski
BTIG’s Lampen says Wall Street consensus is too high for how long he thinks recovery will take
Applovin Corp. and Unity Software Inc. both received downgrades to their respective stocks Thursday after one analyst said he expects a squeeze on mobile gaming revenue could last well into 2024.
Both Palo Alto, Calif.-based Applovin (APP) and San Francisco-based Unity (U) offer marketing, monetization and analytics software that helps app developers grow their businesses. But while Applovin has an apps business that it is treating as a standalone concern and may sell, Unity produces videogame-engine software that competes with Epic Games Inc.’s Unreal Engine.
BTIG analyst Clark Lampen downgraded both Applovin and Unity to neutral from buy-grade ratings and pulled his price targets, as he expects headwinds in the mobile game sector for up to another two years, according to his most recent discussions with developers.
“Affirming there are headwinds after two quarters of deceleration won’t be a surprise to most, but the duration of recovery from them might, and the implications aren’t reflected in consensus,” Lampen said in a note Thursday.
Analysts surveyed by FactSet expect 2022 revenue of $2.81 billion for Applovin and $1.37 billion for Unity. For 2023, analysts expect $2.83 billion from Applovin and $2.19 billion from Unity.
Mobile gaming accounts for more than a third of the global videogame market, with an expected $106.5 billion in revenue in 2022 out of the forecast $275 billion in total gaming revenue, according to IDC analyst Lewis Ward.
In November, Applovin posted yet another miss-and-cut quarter, and on the same day Unity also turned in a weaker-than-expected showing on revenue. posting revenue that fell short of the Street consensus.
In mid-September, Applovin abandoned its $20 billion in cash and stock to acquire Unity, which has been recovering from a disclosure earlier in the year that ad-targeting tools in its Operate Solutions business contained a flaw — the same tools that had been credited with finding a workaround to Apple Inc.’s AAPL opt-out of using Identifier for Advertisers, or IDFA.
Since the beginning of 2022, the year was expected to be weak, and while one analyst expects a rebound in 2023, many expect sales growth to be anemic or even backslide, compared with the previous few years of COVID-19 pandemic-fueled growth.
“Our most recent developer discussions suggest the path back to higher growth rates will involve increasingly including Roblox and [Epic Games’] Fornite-like social/creation elements in games to drive deep engagement,” Lampen said. The analyst considers Roblox Corp. (RBLX) a top pick in the space, rating it a buy with a $51 price target.
“Imitation is flattery, and amidst the reset/recovery process Roblox (and also Epic) could capture incremental leisure time/discretionary spend,” Lampen said.
In Unity’s case, “shares are up significantly post-earnings and our bull/bear framework suggests industry headwinds to estimates are more reasonably discounted at this level.”
Applovin’s “gamer engagement and spending headwinds will be magnified by internal restructuring efforts for the Apps business, a sale of that operation seems unlikely to us,” Lampen said. “We believe a pronounced Software re-acceleration requires underwriting success with Wurl/other new ventures, or greater non-endemic spend capture.”
In April, Applovin added streaming-video company Wurl in a $430 million cash-and-stock acquisition, 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.
Applovin shares fell more than 3%, versus a more than 4% rise in Unity shares and a 3% gain in Roblox, while the S&P 500 index rose 0.6%, and the tech-heavy Nasdaq Composite Index gained 1%.
For the year, Applovin shares have plunged nearly 90%, Unity’s stock has dropped 75%, and Roblox is down 69%, while the S&P 500 is off 17% and the Nasdaq is down 29%.
Of the 21 analysts who cover Applovin, 13 have buy-grade ratings, six have hold ratings, and two have sell ratings, along with an average target price of $25.11. Of the 25 analysts who cover Unity, 13 have buy-grade ratings, 10 have hold ratings, and two have sell ratings, along with an average target price of $34.47.
-Wallace Witkowski
(END) Dow Jones Newswires
12-08-22 1447 ET
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