Applovin jumps 42% as it weighs options for Apps business; BofA upgrades

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Applovin (NASDAQ:APP) has built itself to a 42% gain in a sharp rise in the first hour of Thursday’s trading, following its first-quarter earnings report, where net loss got wider but the company’s EBITDA outlook improved.

The company also noted a new strategic approach to its Apps business, which has historically been managed as an integrated part of the business.

“Given our recent outperformance of our technology, our Software Platform’s current scale, and the immense reach of our MAX solution, we can greatly reduce our reliance on the data from our Apps,” the company says. “Therefore, we have decided to operate our Apps business as if a standalone business rather than a strategically integrated asset.”

The review could result in the “retention, restructure or sale of certain assets, or no change at all to our Apps portfolio,” it says.

BofA has upgraded Applovin (APP) to Buy, noting the higher EBITDA trajectory and an attractive valuation. Management boosted its software segment revenue outlook for 2022 by 20% (to $1.2 billion) and disclosed about 70% in segment EBITDA margins, with conversion to unlevered free cash flow estimated at 70%.

That means Applovin expects $500 million-plus of unlevered free cash flow in the next three quarters, analyst Omar Dessouky notes. As for the Apps segment, he assumes it no longer grows, with sequential upticks in EBITDA margin starting in Q3 and going to 20% by Q1 of 2024.

“Given the new FCF conversion indications, APP bears some resemblance to a compounder stock,” Dessouky says. “We continue to see the evolving privacy landscape as a tailwind for several quarters, and with FCF exceeding $1Bn/year post 2022, we believe shareholders will benefit from management’s ability to acquire and operate assets amidst a consolidating AdTech industry.”

BofA’s price target is $43, suggesting another 11% upside beyond today’s 42% gain in the books.