Why Piper Sandler remains bullish on AppLovin despite selloff

AppLovin Corporation's (APP) stock sank more than 10% on Thursday, sending its shares down nearly 42% for the year.

What makes the selloff unique is the fact that the ad-tech company's market strength has been centered around its AI-powered advertising platform, which means that while many companies in the tech and software space have seen their shares tank this year because of investor concerns over AI disruption, AppLovin faces no such threat.

So what's sending the stock down?

As can happen with the stock market - especially in the age of social media - rumors appear to be the driving force behind the APP slump.

More specifically, there is speculation that Meta Platforms (META) is looking to enhance its AI-driven Advantage+ ad platform to aggressively increase market share in mobile ad bids, with a focus on boosting its ad business on Apple's iOS.

There was in fact a time when Meta dominated the mobile ad space on iOS, but as ad monetization consultant Felix Braberg noted in a post on LinkedIn, this dominance ended with Apple's launch of App Tracking Transparency (ATT) in April 2021, which required users to opt-in to sharing their unique device identifier (IDFA).

Before the launch of ATT, Meta was the dominant ad player on iOS by combining its IDFA data "with its own platform signals to power effective targeting and lookalike models," according to Braberg.

"When ATT rolled out, Meta’s iOS revenue collapsed almost overnight," he noted. "In some cases, daily revenue fell from tens of thousands of dollars to nearly zero as the core signals on which its systems depended disappeared."

This allowed AppLovin to dominate the app space on iOS.

“AppLovin has captured a disproportionate share on iOS,” Josh Chandley, co-founder, president and chief operating officer of Wild Card Games said in a post on LinkedIn. “Meta and Google's e-commerce advertisers can't spend effectively on iOS yet, so AppLovin has offered them a solution that works today.”

Wall Street shrugs off Meta rumors

AppLovin has thus far dominated the mobile app ad space through its Axon engine, particularly building its market share by targeting the mobile gaming sector when mobile gaming first took off with the launch of the iPhone in 2007. It has never relinquished this lead with mobile gaming ad spend, growing it further when it launched its Axon 2.0 AI engine.

The company has also expanded into the e-commerce space, making its own competitive play on Meta's turf.

However, when a tech giant with the scale of Meta takes aim at a competitor, it stands to reason that investors will grow concerned. But Piper Sandler analysts, led by James Callahan, aren't buying the threat to AppLovin's dominance in the mobile gaming app space.

"We spoke with an ad-monetization expert about APP and the mobile gaming landscape given competitive headlines," Callahan said in a client note on Thursday. "The key take: nothing has changed for APP or their market share on the demand or supply side. They continue to out-execute peers and all signs point toward strong E-Com adoption."

This volatility with APP shares is not uncommon, as it has gained a reputation for being one of the more controversial stocks. In fact, the company was a target of four short-seller reports last year, accusing the company of everything from violating the terms of service on major tech platforms in order to boost ad revenue to overselling the effectiveness of its AI technology.

But Piper Sandler remains bullish on APP shares, with Callahan noting that the ad-monetization expert the firm spoke to expressed confidence that "AppLovin's leading market position is intact."