Issue #17: Using machine learning to profit from the mobile gaming wave and a dirt cheap media powerhouse 🎥
Let's get into this week’s report. Here’s what we found:
- A company using AI and machine learning to automate advertising for mobile games.
- An undervalued media company with solid growth potential.
AppLovin Corporation ($APP)
$64.29 - Share price at time of writing
- AppLovin operates on two sides of the mobile gaming ecosystem, serving as a supplier to game developers while offering games itself.
- Its AppDiscovery platform allows mobile game developers to acquire customers easily — a necessity in a crowded marketplace.
- Revenue increased 132% year-over-year in Q1 2021. Full-year guidance suggests 83% top-line growth, with an organic rate of about 70%.
- Growth stocks have sold off sharply of late, and adtech companies like AppLovin have not been immune.
What they do:
AppLovin helps mobile game developers get more users. This is through their platform, AppDiscovery. The platform uses machine learning algorithms to automatically find users who are likely to install and use the app (within the budget of advertisers).
The platform has driven over six billion downloads to date.
Leveraging the data and insights from AppDiscovery, AppLovin moved into the mobile game development space and has launched over 130 of its own successful games.
The majority of AppLovin's revenue still comes from their advertising platform due to the margins being higher. Although the CEO Adam Foroughi expects this ratio to shift over time as they launch more games and their existing games generate more revenue.
Why they’re spiking in interest:
According to MarketStream.io, the total Reddit mentions of AppLovin has already increased by roughly 100% compared to the total mentions last month.
The growth in interest happened around the same time 10+ Wall Street firms initiated buy ratings for AppLovin.
Morgan Stanley analyst Brian Nowak said he is bullish on AppLovin's vertically integrated advertising network and app portfolio.
"AppLovin is uniquely positioned to address the rapidly growing $170 billion mobile app ecosystem," he said in a note to clients.
This surge in positive analyst sentiment likely drove the increase in discussions from investors on Reddit.
Why APP could be valuable:
AppLovin aims to grow the mobile app ecosystem by enabling the success of mobile developers.
The company's software solutions provide tools for mobile app developers to automate and optimize the marketing and monetization of their apps, helping them accelerate growth.
App acquisitions and an active partnership strategy model have fueled AppLovin's rapid growth as the adoption of mobile gaming apps continues to surge.
The downside of this rapid market growth is it has become more difficult for smaller firms and independent developers to capture users as the marketplace becomes more crowded.
Data cited in AppLovin's S-1, in Q3 2019 found that 80% of mobile app downloads were generated by just 1% of developers.
This works in favor of its advertising platform as the number of studios and developers relying on advertising to grow their users will only increase over time.
AppLovin has created a growth flywheel for its advertising business. Improving their advertising software attracts more developers. Those developers get more users, which means AppLovin's software delivers more ads. That creates more data for the company's machine learning engine, AXON, which in turn improves the software offering and so on and so on.
In 2018, AppLovin used its expertise as an advertiser to enter the market itself. It's built out its portfolio through acquisitions, and now has a portfolio of over 130 games.
2020 performance was still solid despite the fact that the pandemic wasn't a boost for most mobile games. As their CEO noted on the Q1 call, it was console gaming that benefited from stay-at-home orders. Most casual mobile games are played 'on the go', which is why they didn't receive the same tailwind.
For a company guiding for nearly 100% revenue growth and expanding EBITDA margins (which bottomed last year) the main factor behind the decline in AppLovin's stock price seems to be the sell-offs in adtech and in growth stocks more broadly rather than the company's performance.
What the risks are:
There are concerns that AppLovin is simply buying revenue on the games side, both through actual acquisitions and ramped-up marketing spend behind internally developed and partner games. Sales and marketing expense has exploded from $167 million (35% of revenue) in 2018 to $628 million last year (43% of revenue).
Competition is also intensifying. Zynga is buying AppLovin rival Chartboost. That deal means Zynga is basically executing AppLovin's strategy in reverse. By moving into marketing off a legacy game development base, it now has a flywheel of its own.
There is also the impact of Apple's new privacy feature. Once updated to iOS 14.5, every single company that wants to track users and their data across different apps and websites now has to ask permission first using a standardized prompt created by Apple.
ViacomCBS Inc. ($VIAC)
$40.16 - Share price at time of writing
- The share price of ViacomCBS has been volatile over the past 6-12 months.
- A combination of events led the price of VIAC to fall steeply without a change in the underlying fundamentals.
- Earnings were good, and the company has catalysts in the return of theatre and synergy with streaming.
- The stock could meander sideways technically for a while, but the valuation is compelling given the company's assets.
What they do:
ViacomCBS is a prominent media company and one of the largest pay-TV service providers. It has a diverse portfolio of network subsidiaries, broadcast rights, and content libraries for a wide range of demographics.
- 37% of its revenue from CBS (primarily CBS and CW Broadcast stations)
- 34% from Cable Networks (Nickelodeon, Comedy Central, MTV)
- 11% from Paramount (movie and TV studio)
- 8% from Showtime
- 7% from Local Media (Owned and Operated affiliates).
In terms of the type of revenue, 40% is advertising, 31% is subscription (or affiliate) fees, and 23% is from licensing content.
Why they’re spiking in interest:
According to MarketStream.io, the total Reddit mentions of VIAC has increased by over 630% when comparing the past 7 days to the previous period.
This surge in interest occurred around the same time news was released that billionaire George Soros's investment firm snapped up shares of ViacomCBS after the Archegos implosion.
Signal: In addition to George Soros, fellow billionaire hedge fund managers Jim Simons and Ken Griffin bought +5.64m and +5.12m shares in ViacomCBS respectively in Q1 2021. Source - cheaperthanguru.com
Why VIAC could be valuable:
Here's a quick summary of why the VIAC stock price fell so sharply earlier this year.
First, the price slumped 27% on March 26th after it announced the pricing of its $3 billion stock sale in part to fund investment in streaming content, a move that would dilute the equity of existing shareholders.
Then, on March 28th, investment firm Archegos Capital Management was "forced by its banks to sell more than $20 billion worth of shares after some positions moved" against the firm, which is the family office of former Tiger Management portfolio manager Bill Hwang.
The opportunity to buy shares in a company like ViacomCBS with a significant margin of safety is rare in the current stock market environment.
However, ViacomCBS presents a unique value opportunity with the stock down roughly 60% from its 52-week high with no material change in the underlying fundamentals of the company.
Streaming services are a future key growth driver for VIAC.
Currently, they operate two platforms PlutoTV and Paramount+.
PlutoTV is a free ad-supported streaming TV service. It currently has 43m monthly active users with a management target of 100-120 million by 2024.
Paramount+ is a more standard streaming platform ($4.99 for ad-supported and $9.99 for premium). It leverages VIAC's extensive content library, news subsidiaries, and is differentiated by offering live sports.
Overall, streaming revenue is $2.6b with a management target of $7b by 2024.
Management is aggressively focused on investing in growth initiatives to scale its streaming platforms that are both subscription-supported and advertising-supported (as seen by their $3b equity raise in late March).
What the risks are:
From a technical perspective, it may take a while for ViacomCBS to once again return to full, sustainable momentum.
When a stock falls this far (and suddenly), Wall Street often uses a wait-and-see approach.
It's important not to become attached to the previous highs that the stock reached assuming it will return to those levels.