Are investors accurately valuing this intangible asset?
Mobile apps, a disruptive digital technology, have fundamentally transformed global consumption. They are now a dominant force in the digital economy, accounting for 88% of mobile device usage and permeating various facets of our lives, from social networking and entertainment to personal productivity, health care, and banking. The Economist magazine estimates that mobile apps drive two-thirds of global internet traffic; approximately 3.5 billion people use mobile apps each month.
Given mobile apps’ omnipresence and their economic importance, a crucial business question arises. Are investors accurately valuing this intangible asset? Colleagues and I are investigating this issue. We find that investors often underestimate the value created by mobile apps — particularly those apps without direct monetizing features such as in-app purchases, subscriptions, or advertising. Although apps that generate revenue through digital goods (e.g., snazzy outfits in Minecraft), subscription fees (e.g., Peloton), or ad placements (e.g., Facebook) are generally well-valued, 80% of U.S. company-owned apps lack these features. Instead, firms use their mobile apps to collect consumer data to refine products and services. This primary category of mobile apps is where mispricing occurs because investors cannot directly observe how they generate cash flows. The economic magnitude of such underpricing is substantial. A trading strategy in buying firms whose apps have the most downloads and shorting firms whose apps have the fewest downloads yields an annualized excess return of 12%!
The next logical question I ask comes from being an accounting researcher. Can investors appropriately price stocks if firms offer discussions of mobile apps in their SEC filings? Though not required by U.S. GAAP (Generally Accepted Accounting Principles), firms have the discretion to highlight important revenue drivers, for example, by tabulating revenue per active user per month. We find such disclosure does help: Mispricing disappears for firms that offer greater discussions of the strategic importance of mobile apps in their financial reports.
Essentially, investors can “get it,” when they can perceive an app’s value through either monetization features or transparent (and expanded) corporate disclosures.
“App Stores Are Hugely Lucrative — And Under Attack,” The Economist, May 13, 2024
https://www.economist.com/business/2024/05/13/app-stores-are-hugely-lucrative-and-under-attack
S. Chen (UT Austin); Y. Liu (University of Rochester), and X. Wu (UC Berkeley). (2025) “Do Investors Understand the Digital Economy? Mobile Apps, Firm Disclosure, and Stock Returns.” Working Paper.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4851807
By Professor of Accounting Shuping Chen