Rosalind Evans
Shares in AppLovin Corp. and Unity Software Inc. surged following both companies’ release of promising results and forecasts the previous evening. Analysts, however, continue to express uncertainty about the pace of the mobile ad market’s resurgence.
AppLovin’s shares saw a staggering rise of up to 29%, reaching an intraday peak of $23, more than doubling their year-to-date price. Meanwhile, Unity’s shares also experienced a boost, climbing by up to 14% to an intraday high of $32.78, marking a 12% increase year to date. In contrast, the S&P 500 index has risen over 7%, and the tech-centric Nasdaq Composite Index has seen an increase of 17.5%.
Analyst Andrew Uerkwitz from Jefferies acknowledged that Unity and AppLovin have rebounded from their low points but maintained his stance of caution, awaiting more solid signs of recovery. Uerkwitz has a hold rating on AppLovin with a price target of $20, while he rates Unity as underperforming with a $24 price target.
Uerkwitz conveyed his critical insights on the mobile ad market, “The market is performing better than feared, bottoming out, and becoming more efficient,” adding, “We agree that the mobile market isn’t deteriorating further — but we’re currently finding it hard to see evidence of a return to double-digit top-line growth.”
He further commented on Unity and Applovin’s outlook, indicating a potential bottoming out of the mobile gaming market and a possible return to single-digit growth. Yet, he sees minimal evidence of meaningful change resuming.
Morgan Stanley analyst Matthew Cost questioned in a note on Thursday, “Is this the first step in the App Economy’s recovery?” The cost has equal weight ratings on both stocks, with a price target of $28 for Unity and $17.50 for AppLovin.
From late 2022, Cost noted a significant resurgence in consumer spending on in-app purchases in mobile games. Companies, including Activision Blizzard Inc.’s King mobile division, Playtika Holding Corp., SciPlay Corp., and Playstudios Inc., reported a boost in in-app purchases during the first quarter.
The results so far of this earnings cycle seem to validate Cost’s cautious stance on how early-stage recovery in in-app purchases may affect in-app advertising, “We are seeing a positive impact on in-app advertising in this earnings cycle.”
While Cost anticipates eventual sector recovery, he doesn’t foresee “significant” growth until the first half of 2024.
According to FactSet data, the average target price for AppLovin is $23.09, up from a previous $20.12. Of the 23 analysts covering AppLovin, 12 recommend buying, 10 suggest holding, and one advice selling.
Of the 24 analysts tracking Unity, 11 advocate buying, 10 recommend holding, and three suggest selling, with an average price target of $36.89.
While AppLovin and Unity have recently outperformed market expectations, the overall sentiment of analysts remains one of caution. The mobile ad industry is still recovering, and while there are signs of improvement, analysts are hesitant to predict a swift or dramatic resurgence.
AppLovin and Unity have a considerable stake in this sector, and their recent share price surges reflect investor confidence in their ability to navigate the current market dynamics. However, there’s a consensus among analysts that further evidence of sustainable growth is necessary to revise the cautious outlook.
Analysts are closely watching the shift in consumer behaviour towards increased in-app purchases. While this trend is promising for mobile ad companies like AppLovin and Unity, how directly it will impact the advertising market is still being determined.
“The mobile ad market is proving to be resilient, but its recovery path is still unclear,” noted Jefferies analyst Andrew Uerkwitz. Morgan Stanley’s Matthew Cost echoed this sentiment: “We remain cautious about the speed at which the recovery is taking place.”
As both companies and their investors eagerly await signs of a more robust recovery, the mobile ad market remains a space to watch closely in the months ahead. The critical question remains: how quickly can the market return to its pre-pandemic growth levels, and what will be the catalyst for such a change? Only time will tell.
