Underrated Growth Stock - Affle
Want to study a high growth technology platform business? Look at Affle!
The Indian tech industry has been a champion of yesterday with a lot of potential for tomorrow. Structural tailwinds combined with high quality of services rendered by Indian tech giants have helped create a robust tech industry. Nifty IT index has generated over 90% in returns in the last year while Nifty has delivered returns of about 43% in the same time period. The sheer outperformance of the IT index is a testament to the quality of the Indian tech companies.
While India is home to some excellent tech companies, a quality stock not spoken much about is Affle. Affle is a global technology company with a proprietary consumer intelligence platform that delivers consumer acquisitions, engagements and transactions through relevant mobile advertising. The company has two business segments (1) consumer platform and (2) enterprise platform. Their Consumer Platform aims to enhance returns on marketing spend by delivering contextual mobile ads and reducing digital ad fraud, while proactively addressing consumer privacy expectations. Their Enterprise Platform on the other hand primarily provides end-to-end solutions for enterprises to enhance their engagement with mobile users. In this newsletter we will give you 5 reasons why the stock is a good buy:
Excellent Fundamentals
Rapid Growth in Customers
Growth in International Business
Data is the New Oil
Extremely Focused Management
Excellent Fundamentals: Despite the devastating effects of the second wave of the pandemic, Affle recorded strong revenue growth in Q1FY22. Revenues grew by 69.8% YoY to Rs. 152.5 crores and EBITDA grew 56% YoY to Rs. 35.1 crore. Adjusted net profit came in at Rs. 29.5 crore which translates into an uptick of 57.3% YoY. Higher converted customers and a greater demand for advertising should provide them with a long growth runway. One thing that is important to note is that their EBITDA margin declined by a shade over 2% YoY, coming at 23% owing to higher employee costs. However, we expect that in the coming financial year the pressures of elevated tech salaries should dissipate slowly.
Rapid Growth in Customers: The number of converted users grew by 85.3% YoY during Q1FY2022, while Cost Per Paying User (CPCU) grew by 2.4% YoY to Rs. 42. The converted users trajectory has been healthy over the last 2 years. In Q1FY20, converted users stood at 35 crores and it expanded to 85.3 crores in Q1FY22. The marketing industry is extremely sensitive to the number of new users acquired and the growth in acquisition of customers. Revenue can be directly linked to the number of paying users. They seem to be doing well in this aspect of their business and hence, our bullish stance on the company.
Growth in International Business: Affle is rapidly growing its business in the US and LATAM. The company is already a market leader in India and with rapid international expansion along with acquisition of companies like Jampp, they are setting a good foundation for its rapid foray into LATAM and US. In Q1FY20 US dollar revenue growth stood at 37.1% and the latest numbers of Q1FY22 show a massive uptick of 70% in US dollar revenue. The US dollar has a notorious history of strong appreciation against the INR and this phenomenon should further aid topline growth of the company. Apart from the currency play, the US market houses some high potential opportunities which in turn can boost the company’s top line.
Data is the New Oil: Affle provides several insights to make advertising more successful and for better optimization of marketing budgets to ensure advertisements deliver the maximum value. Given that they advertise to mostly Android users (which have fewer cookie restrictions than iOS), they sit on a rich repository of data which it can use to refine its algorithms. The data has an indirect and positive relationship with revenue growth.
Extremely Focused Management: The management has clear goals for the company right from operating locations to growth strategies. The management aims to reach over 10 billion connected devices (including personal wearables, connected TV, and smart household appliances) to enable unique and integrated omni-channel consumer journeys over the next 10 years. The management indicated that total mobile ad spend to total ad spends in emerging markets (including India) would shift from 20% to 50% (inline with developed markets) over next 3 years, given accelerated adoption of mobile and higher screen time on mobile by consumers. As a result, mobile ad spend in India is expected to grow at 32.4% CAGR over FY2020-2025. The management also has several strategies like Affle 2.0 and 2V strategy which help the company sustain growth momentum and unlock new verticals for value generation.
The company announced on 26th August its plan to split its share in the ratio of 1:5. The stock was locked in its upper circuit post the announcement. Many companies are shifting their marketing budgets to mobile advertising which is still underpenetrated in India. This coupled with the fact that the company is working on enhancing its artificial intelligence algorithm and rapidly expanding into foreign markets makes us bullish on the stock. We believe the mobile advertising space will grow at a healthy CAGR in the future and the company is at the forefront of benefitting from the imminent expansion in the industry.