One of the most significant changes over the past several years has been the widespread adoption of mobile apps. With the rise of the smartphone, and the democratization of app development, the sheer range of uses for applications has demonstrated itself to be truly immense. Naturally, any large and rapidly growing industry requires certain support in order to thrive. And one company dedicated to offering that support in the form of tools aimed at helping app developers market and monetize their offerings, is AppLovin Corporation (NASDAQ:APP). Growth achieved by the business in recent years has been rather impressive. On top of this, at least on a forward basis, shares don't look all that pricey. Assuming management can achieve expectations for the current fiscal year, AppLovin might not be a bad prospect for long-term, growth-oriented investors.
As I mentioned already, AppLovin's business centers around the company's mobile app ecosystem through which software solutions that make up advanced tools are used to help mobile app developers to grow their enterprises. These tools work by automating and optimizing the marketing and monetization of the apps in question. Operationally speaking, AppLovin's business is centered around three core portions of the enterprise. The first of these is called AppLovin Core Technologies. According to management, this foundational technology infrastructure powers the company's software platform. For the most part, this unit consists of the company's AXON machine learning recommendation engine, their App Graph, which stores and manages anonymized data, and the company's elastic cloud infrastructure. The company's AXON machine learning engine analyzes the data and uses the results to help match users to relevant advertising content through the apps that they are connected to.
The second major solution offered by the firm is its AppLovin Software Platform. This portion of the enterprise involves a comprehensive suite of tools that help developers to get their apps discovered and downloaded by users who will benefit most from them. This is further segmented into three different technologies. The first is AppDiscovery, which is the company's marketing software solution. Powered by AXON, the technology matches advertiser demand with publisher supply through auctions at vast scale. The second offering is called Adjust, which is the company's SaaS mobile marketing platform that allows marketers to use insights to make smarter decisions regarding their marketing content. And finally, we have MAX, which uses an advanced in-app bidding technology that works to optimize the value of a developer's advertising inventory by running a real-time competitive auction for the content in question.
The final portion of the business worth discussing is called AppLovin Apps. This unit consists of a diversified portfolio of over 350 free-to-play mobile games that are run by 19 studios. Games under this umbrella fit collectively into five different gaming genres, the most popular of which would be the casual games category. Both the Owned Studios and Partner Studios Listed by the company use the firm's Software Platform in order to market and monetize the company's apps.
Over the past three years, the management team at AppLovin has done a fantastic job of growing the company. Sales went from $994.1 million in 2019 to $2.79 billion last year. This growth was driven by a few different factors. For starters, the company has successfully grown the number of Enterprise Clients on its platform from 167 in 2019 to 407 last year. At first glance, this may not seem like a large number. But it's worth mentioning that enterprise clients are only those from which the company has collected more than $125,000 in revenue over the past 12 months. Average revenue per enterprise client was $3.15 million last year. That translates to sales of about $1.28 billion from those customers alone. There were also other positives for the company. For instance, the number of Software Platform Enterprise Clients, or SPECs, at the company increased from 133 in 2019 to 461 last year. Customers under this category are defined as those from whom the company collects revenue of at least $31,250 over the most recent three-month window. In 2021, average revenue per SPEC was $503,000. As for the total number of monthly active payers on this platform, we have also seen tremendous growth. In 2019, this number was just one million. By 2021, it had tripled to three million. Over that same window of time, the average revenue per monthly active payer grew from $32 to $43.
On the bottom line, the company has seen some volatility but, on the whole, has generally improved over the years. Net income is not a very good measure, in my opinion, of the company's value. Instead, we should be paying attention to other profitability metrics. One such example is operating cash flow. This number went from $198.5 million in 2019 to $361.9 million in 2021. Another metric we should look at is EBITDA. It also grew during this time frame, climbing from $291 million in 2019 to $597.7 million last year.
Growth for the company has continued into the current fiscal year. According to management, revenue in the latest quarter came in at $625.4 million. That compares to the $603.9 million the company generated one year earlier. Although this represents a decent amount of growth, it did still translate to a miss in terms of revenue growth compared to were analysts anticipated. For the quarter, analysts expected sales to come in $191.6 million higher than what they ultimately did. On the bottom line, meanwhile, the picture was far from great. The company went from generating a net loss of $10.5 million in the first quarter of 2021 to generating a loss of $115.3 million this year. On a per-share basis, the company missed expectations by $0.18. Operating cash flow went from a positive $61.8 million to a negative $31.7 million. Even if we adjust for changes in working capital, it would have worsened, declining from $122.6 million to $68.6 million. In fact, the only profitability metric to improve was EBITDA. It came in at $276.3 million. That compares to the $131.1 million reported in the first quarter of 2021.
Given this mixed and generally disappointing performance, it may come as a surprise to investors that shares of the business closed up 34.7% on May 12th. Instead of focusing on near-term results, the market seems to have been focused on the broader picture. For the 2022 fiscal year as a whole, management now expects sales to be between $3.14 billion and $3.44 billion. Although this represents a nice increase over prior expectations, it is a decline compared to the range of between $3.55 billion and $3.85 billion that management had previously forecasted. On the other hand, management expects profitability to improve drastically, with EBITDA totaling $1.2 billion. That compares to the $1 billion the company had previously thought. No guidance was given when it came to operating cash flow. But if we assume that it will increase at the same rate that EBITDA should, then it should come in at about $726.6 million for the year.
In addition to this, the market also seems to have been excited about the fact that the company now plans to treat its Apps business as if it were a standalone business rather than the prior approach of treating it as a strategically integrated asset. This comes as the company claims that it can greatly reduce its reliance on data from the unit. In short, it is a testament to the maturation of other aspects of the company like MAX and its Software Platform. Upon further review, it is possible that the company will restructure or even sell certain assets, particularly those related to the Apps portfolio.
When it comes to valuing the company, I decided to look at data from 2021 as well as projections for 2022. Using our 2021 results, we can see that the business is trading at a price to operating cash flow multiple of 37.8. However, if management achieves their target for the current fiscal year, this multiple will plummet to 18.8. For the EV to EBITDA multiple, that comes in for 2021 at 25.9. But that should drop to 12.9 if expectations prove to be accurate. To put this in perspective, I decided to compare the company to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 9.4 to a high of 957.7. Meanwhile, using the EV to EBITDA approach, the range was from 9.8 to 59.2. In both cases, two of the five companies were cheaper than AppLovin.
|Company||Price / Operating Cash Flow||EV / EBITDA|
|Bill.com Holdings (BILL)||957.7||N/A|
|Black Knight (BKI)||23.6||20.0|
|Aspen Technology (AZPN)||42.4||31.2|
|Open Text (OTEX)||9.4||9.8|
|Bentley Systems (BSY)||38.2||59.2|
Based on all the data provided, it looks to me like AppLovin may have some growth issues on its top line relative to what management was previously forecasting. But from a profitability perspective, the situation is improving drastically. Shares are not exactly cheap. In fact, using the 2021 results, I would make the case that the stock is very pricey. But if, instead, we assume that management is correct in their guidance, then the pricing of the business starts to look far more appealing. Though still not a strong value play, it does start to look like a GARP (growth at a reasonable price) prospect.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.