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Precision targeting at scale; Initiating with a Buy

As mobile-app transactions get more traction and become mainstream, we believe demand for Affle’s user acquisition-&-retention solutions should grow manifold. Management focus on profitability has created sustainable high-growth and cash-flow generation. We initiate coverage on Affle, India, with a Buy rating and a target of Rs1,220 (based on DCF , assuming 12% WACC & 6% terminal growth rate, implied PE of 45x FY24 EPS) as greater spending on mobile advertising, tapping connected devices, deeper penetration in the top-10 verticals, newer regions, tier-2 and -3 cities in India drive Affle’s long-run growth.

Mobile ecosystem healthier than ever. Digital advertising comprised ~47.2% of total ad-spend globally in 2021 and ~49.5% of the U.S. market. By 2025, digital ad-spend will comprise over 53% of total ad-spend globally. Mobile advertising accounted for a considerable chunk of the digital ad spends. With smartphones providing unparalleled reach and access to billions worldwide, every industry now is mobile-focused. According to Juniper research, despite app-store privacy changes by Apple and Google that are hitting advertisers, global mobile advertising spend will increase from $295bn in 2021 to $350bn in 2022, growing 18.6% y/y and driven by in-app growth as brands strive to secure consumer trust.

Outcome-based business model is less cyclical during a high-inflation and interest-rate scenario. While dominance in the industry is largely of companies operating on clicks, views and impressions, Affle primarily earns revenue from a 'consumer platform' on a ‘cost-per-converted-user’ basis. This is based on 'consumer acquisition' and 'transaction'. It focuses on acquiring customers for businesses, usually through targeted user downloads and opening an app or engaging with one after seeing an ad by a company. Thus, Affle earns revenue only if it successfully converts its audience into customers, which we believe is less cyclical because when advertising budgets are tight, advertisers would prefer conversion-linked RoI models.

Risks: Data protection and privacy policy could affect the business.

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