App Store Fee Cuts Set To Boost Duolingo, Match, Bumble Earnings

Following recent legal setbacks for Apple Inc. (NASDAQ:AAPL) regarding alleged monopolistic practices and new App Store fee policies driven by the EU’s Digital Markets Act (DMA), Bank of America Securities (BofA) analyst Curtis Nagle has re-evaluated the financial outlook for major subscription service companies.

His updated analysis suggests that a reduction in app store fees, currently a significant cost of revenue, could provide a boost to the earnings of Duolingo, Inc. (NASDAQ:DUOL), Match Group, Inc. (NASDAQ:MTCH), and Bumble Inc. (NASDAQ:BMBL).

The analyst emphasized that while shifts in user and revenue trends will continue to drive sentiment and valuation for subscription-based companies, lower app store fees could offer meaningful earnings upside that Wall Street hasn’t fully priced in. App store fees currently represent the largest share of cost of revenues, 17% for Duolingo, and 20% each for Match Group and Bumble.

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On a gross basis, every 500 basis-point (bps) shift in subscription revenue to off-app payments could boost Duolingo’s EBITDA by 3.3%, Match’s by 2.8%, and Bumble’s by 3.0%. Similarly, a 100 bps reduction in app store fees could lift their EBITDA by 3.2%, 2.7%, and 3.5%, respectively.

While he is constructive on earnings accretion from lower fees, potential offsets include reinvestment of savings and companies limiting efforts to move payments off the app if it results in frictions that decrease subscriber conversion.

Nagle raised his price forecasts for Bumble to $5.50 from $5.25 and Match Group to $34 from $32 due to higher sector valuation. He maintained his $450 price forecast for Duolingo.

This shift or fee reduction is expected to translate to a 1-2% increase for US-based revenues for these companies. The impact on EU-based revenues is estimated to be smaller, resulting in only a 0.5% EBITDA increase.

As per Nagle, Bumble stands to gain the most from a potential drop in U.S. app fees. Two recent developments, the Apple-The Department of Justice (DOJ) case and an April court ruling in the Apple-Epic case, support this possibility. The analyst noted that the latter ruling allows developers to direct users to off-app payment options. Although Apple is appealing, he pointed out that it plans to comply now.

Bumble, along with Duolingo and Match, is already testing off-app payments. Analysts expect more updates during the second-quarter earnings in August. According to Nagle’s estimates, every 500 bps shift to off-app payments and a 100 bps cut in U.S. app fees could boost Bumble’s total EBITDA by 1.7%. He said that even when limited to U.S. subscription revenue via Apple’s App Store, EBITDA could still rise by 1.2%.

Because Duolingo, Match, and Bumble generate only about 20% of their subscription revenue from the EU, compared to 45% from the U.S., Nagle noted that they have limited earnings upside if EU app fees decline due to DMA compliance. The analyst estimated that every 500 bps shift in EU revenue to off-app payments and a 100 bps reduction in EU app fees would raise total EBITDA for these companies by only about 0.5% on average.

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