AppLovin vs. Unity Software: Which Mobile App Stock is a Better Pick?

The mobile app ecosystem has developed rapidly with greater penetration of smartphones and the increase in mobile gaming. Due to the pandemic, user engagement has risen rapidly as more users play mobile games.

According to an RBC Capital report, the mobile gaming total addressable market (TAM) was worth $91 billion last year, representing more than half of the total global gaming market, which is worth $175 billion.

Using the TipRanks Stock Comparison tool, let’s compare two mobile app companies, AppLovin and Unity Software, and see how Wall Street analysts feel about these stocks.

I am neutral about both stocks mentioned in this article.

AppLovin Corp. (APP)

AppLovin Corp. provides software solutions with advanced tools for mobile app developers that enable developers to monetize, market, analyze and publish their apps. The company generates revenues from two sources: business clients and consumers.

Business clients made up 46% of the company’s total revenues, while consumer clients made up the remaining 54% in Q2.

In the second quarter, revenues soared 123% year-over-year to $669 million, surpassing analysts’ estimates of $640.5 million. Diluted earnings came in at $0.04 per share, in line with a consensus estimate of $0.04 per share.

Adam Foroughi, CEO and co-founder of AppLovin said, “Our strong execution and growth this quarter, in spite of anticipated industry headwinds around data privacy, speaks to the tremendous opportunity ahead of us and to the distinct advantages leveraging our ML-based software and proprietary first-party insights to help clients grow.” (See AppLovin stock chart on TipRanks)

The company did not give any guidance for FY21 or Q3, and Applovin’s CEO elaborated on that on its earnings call, saying, “But we decided financial guidance should match the way we operate, and we’ll update those annually for you all, unless we’re going to diverge materially from that guidance.”

APP uses a metric called total software transaction value (TSTV) “to measure the scale and growth rates of our software platform,” as the company’s revenue from its business software platform is from third-party clients using APP’s software platform to search for new clients.

TSTV is calculated by adding back “eliminated intercompany revenue from owned and operated marketing spend.”

In Q2, the company’s TSTV grew four times year-over-year to an annual run rate of around $900 million.

J.P. Morgan analyst Alexia S. Quadrani was of the view that this rise in TSTV compared favorably with the fiscal performance of Unity Software’s (U) Operate solutions business and highlighted “the strength of its platform amid significant changes to the mobile ecosystem.”

The analyst reiterated a Buy and a price target of $83 (7.3% upside) on the stock.

Analyst Quadrani found it interesting that APP plans to launch more “evergreen” titles in the second half of the year. AppLovin defines “evergreen” titles that can generate annual recurring revenues in excess of $100 million.

The analyst believes that APP could scale these gaming titles rapidly with a significant rise in user acquisition costs. “We note these evergreen games were not assumed in prior guidance, creating upside to consensus estimates should the company execute,” Quadrani added.

According to the analyst, APP has used its “strong competitive position in mobile user acquisition and monetization to successfully integrate into games publishing, creating a closed ecosystem of services and content akin to large technology platforms.”

Moreover, Quadrani believes that the stock can “generate strong shareholder returns without multiple expansion.”

Turning to the rest of the Street, analysts are bullish about AppLovin, with a Strong Buy consensus rating, based on 4 Buys and 1 Hold.

The average AppLovin price target of $79 implies 2.1% upside potential from current levels.

Unity Software (U)

Unity is a platform that provides two sets of solutions: Create Solutions and Operate Solutions. Create Solutions provides a comprehensive portfolio of software solutions for developers to create 2D and 3D content that can be deployed on more than twenty platforms, including Microsoft Windows (MSFT) and Apple’s (AAPL) Mac.

Unity’s Operate Solutions offers app developers a set of solutions to grow and monetize their end-user base. The company competes with AppLovin through the Operate Solutions business.

Interestingly, Unity is also one of APP’s partners and enterprise client.

In Q2, Unity posted revenues of $273.6 million, a jump of 48% year-over-year, surpassing the Street’s estimates of $243.07 million. Revenue from Operate Solutions grew 63% year-over-year to $182.9 million.

The company’s loss per share narrowed to $0.02 per share, from a loss of $0.09 reported in the same quarter last year. Analysts had estimated a loss of $0.13 per share. (See Unity Software stock chart on TipRanks)

Luis Visoso, Unity Software’s CFO said, “While our strong performance is broad based, we are particularly proud of the performance from our Operate Solutions group that expanded market share in a tough environment. Our strong performance gives us confidence to raise guidance for the year, again.”

Unity Software expects its Q3 revenues to be in the range of $260 million to $265 million, while for FY21, the company expects revenues to be in the range of $1.04 billion to $1.06 billion.

Interestingly, the company is looking at increasing momentum beyond gaming industries. In Q2, the company added three new automotive manufacturers and three consumer product companies as its customers.

Macquarie analyst Tim Nollen believes that the company’s software can be applied across different industries for “various aspects of design” and is “instrumental in building the future state of the internet – the metaverse. We think it is truly unique and puts the company in a strong position amid converging secular trends in mobile, gaming, and advertising.”

Moreover, according to Nollen, the total addressable market (TAM) for Unity “is both exponential and hard to quantify, though it starts at $80bn and we see its penetration rate well under 5%.”

Indeed, Unity’s management said on its earnings call, “In gaming, on the create side, we enjoyed a share exceeding 50% overall of the year ending 2020. And as you know, our market share is even higher in the fastest growing subsegments of mobile gaming in VR/AR [virtual reality/ augmented reality].”

Analyst Nollen is of the view that this market share is five times the market share of Unity’s closest competitor. The analyst initiated coverage with a Buy rating and a price target of $152 (12.5% upside) on the stock late last month.

Turning to the rest of the Street, analysts are bullish about Unity Software, with a Strong Buy consensus rating, based on 10 Buys and 2 Holds.

The average Unity Software price target of $137.55 implies 1.8% upside potential from current levels.

Bottom Line

While analysts are bullish about both stocks, based on the upside potential over the next 12 months, AppLovin seems to be a better Buy.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article​.

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1 Comment

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