Starting in early 2021, Apple (AAPL 0.49%) will begin prompting users to opt in or out of application activity tracking. Alphabet's (GOOGL -0.15%) (GOOG -0.08%) Google is expected to eventually follow suit, rewriting -- at least in part -- how mobile advertisers and app developers make money. Last month, I listed five companies that could benefit from the coming changes. Digital Turbine (APPS -1.91%), Cardlytics (CDLX -3.29%), and Unity Software (U -0.38%) are three more that could win from the end of user activity tracking.
1. Digital Turbine: A direct relationship with device manufacturers
Devices like smartphones, tablets, and smart TVs are becoming a new type of digital retail ecosystem. Device manufacturers are a gateway to eyeballs, and thus a coveted distribution medium for advertisers and app developers. Digital Turbine has a direct relationship with over 40 mobile operators and device manufacturers (most of them utilizing Android), providing an outlet for ads and apps to get directly on a device and in front of the consumer.
To be fair, if individual app activity tracking does die off, it could hurt Digital Turbine in the short-term. After all, more granular data on individuals is highly coveted and fetches premium pricing. But that doesn't mean all activity tracking will go away. Digital Turbine can still help marketing teams make informed decisions on broad-based demand and get premium placement directly on a smartphone or other device, as well as help manufacturers themselves increase revenue by selling said placement of ads and apps onto their wares.
But Digital Turbine is coming off an incredibly successful 2020 and could build on its momentum as privacy standards change. The company's revenue increased 365% from 2016 through 2019, and doubled year-over-year through the first nine months of 2020 (due in part to a small acquisition of a peer). Even better is the 277% year-over-year increase in free cash flow to $21.5 million this year as the company starts to reach a more efficient scale in its operations.
Even after a 560% share price run this year, Digital Turbine is still a small company, with a market cap just over $4 billion as of this writing. It's a premium-priced stock at over 21 times trailing 12-month sales, but its direct relationship with device manufacturers could be a key factor in it maintaining its momentum and free cash flow generation. It thus could be a worthwhile investment as application standards evolve and favor user privacy.
2. Cardlytics: Direct access to banking customers
While Digital Turbine focuses on devices themselves, Cardlytics instead helps its customers gain marketing exposure via banks. Specifically, the company operates digital rewards programs (like rewards points earned on debit and credit card purchases) for banks in the U.S. and U.K. to offer their banking customers. Cardlytics users include some of the biggest banking names around, including JPMorgan Chase (JPM -0.96%), Bank of America (BAC -1.46%), and Lloyds Banking Group (LYG 1.88%) to name just a few.
But what's this to a marketer? For a bank, the ability to personalize money-saving offers to a customer can increase engagement and loyalty. For an advertising team, though, Cardlytics' platform gives insight into consumer purchasing trends across the massive banking system and provides another way to increase brand awareness to users directly. Ads and offers can be placed on a bank's rewards program, and effectiveness of the campaign within tracked. Talk about a workaround for device-level privacy.
Granted, with the pandemic crushing consumers over the last year, Cardlytics hasn't enjoyed smooth sailing in 2020. Revenue fell 15% through the first nine months of the year to $120 million. The company's progress toward breakeven last year has thus also reversed course, and free cash flow is negative $15.5 million over the last 12-month stretch. That could make the 20 times trailing-12-month revenue valuation a difficult price to stomach for some investors right at the moment.
However, optimism has been building as a vaccine could bring an end to negative effects from COVID-19 on the global economy. Cardlytics could be a big beneficiary from a rebound in consumer trends, and could sit atop an increasingly lucrative market if access to device users loses some value among marketers. This is also a small firm with a market cap of $3.8 billion, and has a healthy balance sheet with $288 million in cash and equivalents and $172 million in convertible debt (allowing debt holders to convert to stock down the road). Armed with plenty of net cash, this business is worth placing on your watch list if you think Apple's move to end app tracking will alter the advertising landscape in the years ahead.
3. Unity Software: A platform built for game developers
Investors will recognize Unity Software as one of the hottest IPOs from 2020. The company raised over $1.3 billion in fresh cash in September when it became a publicly traded concern, and has since been off to the races as video game developers flock to the cloud-based software platform for game and other 3D content creation.
But Unity has its eye on much more than just video game creation. It's also preoccupied with helping developers distribute and monetize their content as well. The company just recently added a new collaborative tool to help marketing teams and their creative agencies download engineering data to accelerate the creation of advertising media, complementing other platform capabilities like its Cloud Content Delivery (to actually distribute data to end users via the web), Unity Ads and IAP (for monetization), and Unity Distribution Portal (to sell games and content via multiple app stores).
I think this could be an overlooked part of Unity's platform for creatives and marketers. Boasting some 2.5 billion end-users of games and content created with the Unity software suite, this company could be an important partner for businesses looking for new ways to gain access to consumers via digital channels. Case in point: Revenue growth accelerated to a 53% year-over-year pace during the 2020 third quarter, the first period reported from Unity as a public company.
This is already a sizable business with a market cap of nearly $40 billion as of this writing, and shares trade for a steep 56 times trailing-12-month sales. It's no closely held secret that Unity is at the forefront of what could be a massive movement spanning video game, TV and movie, and engineering design, creation, advertising, and monetization. Nevertheless, in a world where privacy is key, Unity could become a trusted partner in digital distribution and sales across multiple industries. If you're looking a decade or more down the road, don't let a hefty valuation deter you from giving this one a serious look.