Appier Group (4180 JP)

A Taiwanese advertising technology company listed in Japan

Investment thesis

Appier Group, a Tokyo Stock Exchange-listed advertising technology (adtech) company, was founded by Taiwanese scientists. The underlying theme is deprecation of third-party cookies and advertisers aiming to improve return on ad spend (ROAS) by personalizing engagements with customers. Appier’s AI-driven marketing automation is a relatively new business model, which may make it difficult for domestic-focused investors to evaluate. However, by studying U.S. adtech peers like Applovin (APP), Braze (BRZE), and Zeta Global (ZETA), I believe Appier has a competitive advantage with long-term growth potential. At 4.4x TTM sales/EV, the current valuation is attractive given the company’s strengths. I anticipate a 40% upside from valuation re-rating and an additional 20-30% annual increase in intrinsic value through profit growth.

Risks

• I assume that competitors will struggle to match ROAS realized by Appier's algorithm in Asia, where it generates 80% of its revenue. To compete, rivals would need to acquire substantial first-party data in Asia and undergo training, making it difficult to catch up. While more data generally equals improved performance, the quality of algorithm matters too (for example, we can agree that it will be difficult to create a better trading algorithm than Renaissance Technologies). Nonetheless, established global adtech firms could pose a competitive threat if they aggressively target Appier's domain.

• Customer concentration. Coupang (CPNG) accounted for 30% of revenue in 2023 and roughly half of the year’s revenue growth. While new customer acquisition is strong, diversification away from Coupang is important.

• Decelerating revenue growth rate. I feel that investors dislike the decline of delta (year-over-year revenue growth rate), which is the case of Appier: delta has declined from more than 50% in 2022 to 27.8% in 2024 Q3, which probably was the reason for the share price decline after the earnings announcement. While I believe that Appier can maintain a 20-30% annual revenue growth at least for the next three years, the market is more often than not smarter than me.

What is the underlying theme?

The first thing to understand is what first-party data is and what Apple’s IDFA changes and Google’s efforts to phase out third-party cookies mean for advertisers. If you are unfamiliar with these concepts, I recommend additional research, as I may not capture every detail accurately (recently there was a good podcast called A Primer on Digital Advertising). Here is a summary of my understanding.

John Wanamaker famously quipped, “Half the money I spend on advertising is wasted; the trouble is, I don’t know which half,” in the early 20th century. Despite advancements in targeting, traditional advertising, like TV commercials, still includes substantial waste. Enter Google and Facebook: platforms that enabled advertisers to personalize ads based on user information and online activities. However, a key problem is that these platforms share limited data and report ad performance metrics from their own systems, making it difficult for advertisers to compare return on ad spend (ROAS) across platforms. In addition, a typical click-through rate (CTR)—measuring how often people click on ad links—is around 1-2%, indicating there may still be room for improvement in online advertising’s effectiveness.

To gain a more comprehensive view of their customers and potentially improve ROAS through more relevant ads, advertisers have relied on third-party cookies and in-app trackers to monitor user behavior across different sites and applications. However, with Apple’s IDFA privacy changes and Google’s upcoming restrictions on third-party cookies, advertisers now have fewer data points to track and understand customers.

This is where first-party data, which includes information directly owned by advertisers—such as purchase history, website visits, and duration on specific pages—has gained increased attention. It might be surprising, but advertisers often cannot easily match users across desktop, mobile browsers, and apps. This challenge arises partly because established software companies like Salesforce (CRM), which was founded in the early 2000s, originally designed their systems for desktop browsing before the smartphone era. To adapt, they’ve acquired various services and stitched them together using APIs to create a cohesive experience, yet have not fully integrated their backends, resulting in tech debt.

In contrast, newer advertising technology companies, formed in the past 15 years, were designed with a seamless integration of user activities in mind. These companies offer more efficient, real-time, and cost-effective ways to personalize user engagement across platforms.

Business description

Founded in 2012, Appier is an adtech company which uses AI to enhance ROAS and customer engagement. Appier’s business is similar to Zeta’s but its primary markets are in Asia (Zeta generates more than 95% of its revenue from the US). Because the efficacy of digital advertising is measurable like click-through rate and conversion rate, clients can measure the value of Appier's solution. Most of Appier clients are SMBs with less than 500 employees. For Appier, average annual revenue per client is around Y12mn ($80,000 based on $1=Y150).

Traditional digital ads are becoming less effective due to the lack of personalization and the loss of third-party cookie data. Legacy customer relationship management tools could not match customer visits from their phones, PCs, and apps. In addition, customer information is batch processed, causing delays (for example, they could not send a $10 off coupon to a customer who is on the web but hesitant to make a purchase). Appier and the new breed of digital advertising companies leverage first party data to provide real time personalization, driving higher ROAS.

In 2023, Appier booked an estimated 30-35% of revenue from Korea and Japan respectively, and 16% each from the U.S. & EMEA and Greater China. While U.S.-based adtech companies focus on the Western markets, Appier offers unique exposure to Asia.

Competition

In Japan, the main technology stack used for marketing automation and customer engagement is offered by the traditional players, such as Salesforce, Adobe (ADBE), and HubSpot (HUBS), often in partnership with local ad agencies such as Dentsu (4324), Hakuhodo DY (2433), and Cyber Agent (4751). These tools, however, struggle with real time data updates and complex customer analysis. Initiating a marketing campaign may require marketing managers a deep programming knowledge. Emerging companies like Appier and Plaid (4165) offer easier maneuverability with advanced analytics. While Braze and Zeta have offices in Tokyo, their main markets have been the Western countries. The US accounts for about 60% of the global customer engagement market spend, according to Braze.

Appier differentiates itself by recommending ad spend plans to clients based on its machine-learning algorithm. In one instance, Appier created more than a million customer segments and marketing plans for the highest LTV segments, resulting in 4x increase in conversion rate. The management commented that over 80% of uses cases deliver direct revenue or profit benefits. Because customers can measure ROAS from Appier's algorithm, they tend to stick with the software and increase spending. This enables Appier’s algorithm to ingest more data and improve the accuracy, which, in turn, improves ROAS and customer retention. Appier’s net revenue retention has been 120% while annual customer churn is around 7%.

This positive feedback loop is what made AppLovin successful in mobile gaming advertisements. With the lack of serious competitors in the region, Appier can potentially establish a stronghold in Asian adtech market. Appier was not mentioned in Singular ROI Index in 2023 but earned five rankings in the 2024 Index including Android Regional ROI for APAC and Android regional retention for APAC. The report concludes "[o]nly a handful of Singular customers are currently using Appier, but with results like this, it’s likely others will feel the need to give the company a try."

Ownership and management

The three co-founders, who serve as CEO, CIO, and COO, collectively own 23.7% of the company. The CEO Chih-Han Yu has Masters from Stanford and ph.D from Harvard in AI, and has published research articles in the field of AI, robotics and machine learning. While most of the reinvestment has been in R&D, Appier has occasionally made tuck-in acquisitions to bolster its product portfolio. At the Q2 2024 earnings, the company announced to repurchase up to Y1bn worth of shares. This is less than 1% of Appier's market cap but the management seems to have a good intention on capital allocations.

Earnings expectation and target price

Appier projects 30% revenue growth in both 2024 and 2025 with a 15-20% EBIT margin expected by 2025. Equity dilution risk is low because annual stock compensation is about 0.15% of shares and free cash outflow is small. Appier has Y14.3bn of net cash and is likely to generate positive free cash flow in 2025 following a Y1-2bn outflow in 2024. The largest expense in 2024 and beyond is R&D which has been about 24% of the revenue when capitalized R&D is included. Globally, SaaS companies growing revenue 30% annually trade at 8-11x TTM sales/EV, and in Japan, 7-9x. If Appier trades at 7x sales/EV, its share price is worth Y2,200, representing roughly 40% upside. As its revenue and profits grow, I expect a further upside to the stock.

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