Deep Dive: AppLovin Corporation ($APP) Stock Analysis
An already scaled AI-beneficiary in the Mobile Gaming AdTech space, growing a software platform 91% YoY.
Disclosure: At the time of writing, I am long shares of APP. I may add, reduce, or sell my position without notice. This write-up is strictly informative, includes my opinions and does not constitute as financial advice. Please do your own due diligence.
After a near six month hiatus from writing, I have still been evaluating market opportunities, but have found many colleagues in the space to be publishing great work on names I was already invested in. However, I haven’t seen as much work revolving around AppLovin, and wanted to share my thoughts… enjoy!
What I’m Drawn To:
Exposure to 1.4 Billion Daily Active Users & 170 Million in the U.S. playing games that can be monetized
Expansion plans into the Connected TV industry, as data from MAX is being filtered into Wurl (CTV platform), providing a new avenue to monetize ad inventory
The adaptive nature of AXON 2.0, enabling massive operating leverage as each incremental dollar of sales is distributed more effectively across the Real Time Bidding system
Applovin’s history of staying nimble, as they have been forced to re-write the code for AXON multiple times to comply with updated App store regulation
Pre-Mortem / Associated Risks:
Contractual Stickiness: “Substantially all of the Company's contracts with customers are fully cancellable at any time or upon a short notice” - latest 10K
Changes to publisher compensation or incentives, thus manipulating the supply & demand functions for ad inventory sales
Capital structure: KKR Denali Holdings owns 33.3% of total voting power (as of 2023 proxy doc)
The threat of Google’s shift to Real Time Bidding in-app advertising… despite helping the industry maintain a strong CAGR
MAX’s “mediation” tools proving to be commoditized with time vs. competitors like IronSource (owned by Unity)
Scrutiny or AppStore policies changing, squeezing the developer and advertiser, reducing the incentive to produce content on these platforms
Brief Description:
AppLovin Corporation, $APP, or “APP” is an ad discovery platform empowering game developers and advertisers to monetize their outreach and messaging. With an emphasis on mobile game advertising, this is done through marketing outreach (AppDiscovery), monetization efforts (MAX), and insights to enhance impression value (Adjust). Additionally, the company is branching out to Connected TV (CTV) through an acquisition called Wurl.
AppLovin was founded on accident, as CEO, Adam Foroughi initially sought to develop apps. Previously launching a platform for web app development in 2008, he realized that the only way to scale was by begging the App Store to acquire a feature. He also noticed the gap for app developers in marketing and pivoted to address this void.
The company is based out of Palo Alto, California and was founded in 2012 by current CEO and Founder, Adam Foroughi, VP of Product, Andrew Karam, and John Krystynak, who is no longer with the company. $APP is a multi-national organization, with about ~40% of sales in 2023 stemming outside the United States. Sales are recorded under two segments: “Software Platform” and “Total In-App” revenues.
Software Platform:
The software platform contributed ~56% to total sales in 2023, with the “AppDiscovery” and “MAX” platforms being the catalysts. AppDiscovery is AppLovin’s marketing solution for user acquisition and monetization. After an app developer launches a campaign, an adaptive machine-learning powered engine called AXON pairs users most likely to engage with the targeted ad campaign. Campaign features include: a UI to manage Return on Ad Spend, a backdrop of ROI analytics, a Lifetime value reporting function, with details on source and location the ads took place. Finally, users have access to SparkLabs, the AppLovin creative team for ad solution and testing purposes. Also relevant, the vast majority of advertising dollars on the app discovery side comes from Max publishers, playing to AppLovin’s flywheel effect as one of the only scaled mobile-gaming focused advertising names.
Examples of Ad Strategies Employed:
Interstitial Ads: Full-page ads that cover the UI after conducting activities in-game, are unavoidable, and retain the highest impression rates, often 5 to 10 fold compared to Banner ads
Banner Ads take the name of their physical counterpart, acting as posters, that tend to be motionless, and yield lower earnings
Playable Ads: Enable the user to interact with a mini-game with the goal of driving downloads
Rewarded Ads: Full-page ads that offer an advert in exchange for an incentive (think an additional life in Subway Surfers). They are powerful, but become a double-edged sword when trying to avoid account issues
Offerwall Ads: Act as a way to connect users to 3rd party platforms by providing logins through Google, email, phone number etc. for rewards.
Native Ads: Designed to be camouflaged in the background, these ads tend to focus on general interests associated with the app, and are less intrusive
Open-app Ads: When coming back from another app, these ads take up an entire screen upon opening. These are rather divisive, as they can discourage further user engagement.
MAX is a performance-based mediation platform that enables game publishers to connect to a wide variety of ad networks and exchanges. This real-time bidding process is undergone in milliseconds with the insights of AXON, opening ad space to programmatic auctions, where bidders compete for ad inventory, ensuring its ad space can be sold to the highest bidder. MAX fills auctions with demand sources, pulled from AppDiscovery, the AppLovin Exchange (ALX), 3rd party networks like Meta, Google, direct advertisers, or even dating apps.
Max takes a 20% cut on the revenues a publisher makes from selling game ads, as the app discovery business, (via AXON), acts more like a trading business. Effectively, AppLovin is paid to generate a certain amount of traffic, or ad revenue, and must acquire a certain amount of ad inventory to be compensated, thus making it performance-based. MAX is a vital piece to the puzzle as it creates a strong closed loop, where game developers can enhance their insights, to reinvest the earnings and grow their monetizable base.
AppLovin provides customers access to their software, however, they do not dictate the placement of ad inventory before it is transferred to the advertiser. As a result, AppLovin acts as an intermediary between publisher and advertiser, and is compensated based on price per advertising unit or the number of ads delivered. AppLovin then makes money on the spread between what it has to pay to acquire ad inventory, and the revenues it generates from its clients.
Total App Sales:
The second reportable segment, “Total In App” purchases made up ~44% of total sales in 2023. This segment is broken into two categories, “In-App Purchases” and “In-App Advertising”. The In App purchases consist of both cosmetic or experience enhancements, where AppLovin is compensated on a fixed cost basis. In App Advertising is generated from selling ad inventory to 3rd party advertisers. Ad inventory can be purchased via the Software platform or through alternative ad networks. Revenue is recognized when the ad is displayed to users. Initially, AppLovin sought to ingest 3rd party data. However, part of what makes the “walled garden” (Meta, Amazon, Google) so powerful, is their unwillingness to share data to independent ad networks. As a result, AppLovin aimed to gain data in-house. They would go on to acquire stakes in or purchase 11 gaming studios outright with ~350 gaming titles worldwide. The significant data streams are found within the user’s in-game tendencies, how they interact with the world around them, called “engagement data”. This helps curate AXON to understand what kind of gamer, the user is. Thus, enabling the engine to learn a proactive stance in understanding how to better advertise to such user. Despite a presence here, $APP has since divested studios, demonstrating they want to make this less of a focus moving forth.
Call Option: Connected TV (CTV):
Although not currently part of the narrative, AppLovin’s expansion ventures have brought them to the Connected TV (CTV) space, after acquiring “Wurl” back in 2022 for $378.2 Million. Now fully integrated, acting as its own subsidiary to $APP, Wurl is able to ingest much of the data that was produced from their mediation platform, MAX. The CTV segment feels rather akin to the mobile app development realm a decade ago. In particular, this sector is not very performance based, has yet to convert to interstitial advertisements, and struggles with delivering relevant consumer experiences. Wurl is still small, and the company doesn’t break out Wurl’s contribution to total sales. As of June 2024, Wurl has 150 employees, 2/3 of which are engineers, and the rest being sales and marketing, following the parent company strategy. Admittedly, I believe that ROKU has a large advantage in the CTV space relative to competitors, but this is once again a call option on the future of AppLovin.
One additional aspect here is blockchain and NFT’s. Although rather irrelevant to mobile gaming today, CEO, Adam Foroughi has emphasized the importance to providing these tools for game developers, as the next iteration of the web is popularized. What the developer toolset would look like is currently unknown, however, Foroughi has made it clear it’s a topic of interest.
Current Narrative:
APP shares are being priced as if it’s a traditional advertising platform with mid teens EBITDA margins, without the presence of a software platform. Keep in mind, the software platform offers 70+% Adjusted EBITDA margins growing 91% year over year. Nowhere else in the market have I seen a true scaled beneficiary of AI growing near triple digits at a multi-billion dollar scale, trading for ~15x 2025 Free Cash Flow.
Bears may say that the security deserves to be priced this way as a hedge against a decline in sales growth. This is understandable, as the gaming advertising industry is cyclical, and can be seen when the market took a hit in 2022. However, I see a few factors that lead me to believe that not only are these cash flows defensible, they are prone to expand substantially:
Flywheel Effects via AXON:
Admittedly, I am quite hesitant to claim that a company is a true beneficiary of AI or Large Language Models (LLM’s). Very seldom does an AI company bring something substantial to market, instead creating ChatGPT counterparts, or outright disguising their own product behind ChatGPT. However, AppLovin is not this way. In the Q3 ’23 call, the CEO discussed the importance of AXON to MAX, claiming the [goal is to host a marketplace to take networks, plug [them] into the most efficient means of charging for ads, therefore the publisher yields more, spends more on user acquisition, so more dollars go back into the ecosystem].
Adam Foroughi is describing a classic closed loop effect, characterized by flywheel effects. With Free apps becoming the norm for app store transactions, developers require a means of monetizing for continued updates, or scale enhancement. AppLovin’s AXON is essential to near-instant pairings based on user trait and interests, to find a bidder for the ad supply.
2. Data Advantage & Network Effects:
Personally, I believe this is a sustainable competitive advantage as AXON (2.0) will continue to adapt and become more refined in its recommendations as more data is streamed. Additionally, AXON is in its second generation, with the new insights being incrementally more accurate and powerful than before. Within just two quarters after launch, AXON managed to grow the software platform by 50% in 6 months! Not only is the platform self-improving, but it’s ingesting both advertiser data from the software platform and through their catalogue of 200+ mobile games across diversified studios. Back in 2018, $APP started acquiring games and studios to acquire first-party data to further enhance AXON. This is another structural advantage that has helped the Apps business advance the software business CPM and distribution.
The emphasis made on their catalogue data has been integral in driving software platform scale, but has also helped establish strong network effects. The way I view it, the more incremental users playing AppLovin games, the more user engagement is accrued. As more insights are consumed, more profiles can be examined and refined to frame up the individual user. As a result, AXON is able to improve CPM efficiency on behalf of their true customers, game developers, while providing a more curated ad experience for users. This completes our closed loop, as users want to engage more with AppLovin games, interact more with adverts, driving game developers to continue monetizing with the company.
3. Personnel & Platform Adaptation:
For those that have read my Adyen writeup, I sense a great deal of strategy crossover between the two companies. AppLovin was founded with Engineering investment in mind. The two organizations’ structural advantages enables them to operate with little overhead. In fact, $APP didn’t require a sales and marketing team until 2022. It’s extremely rare that an organization can scale to $2.8 Billion in top line without a true sales team. In total, AppLovin has ~1,750 employees, most of which on the Engineering side of the house. While, their closest competitor, Unity has 6,750 employees, with $2.1 Billion in sales.
Much of the credit is rooted in AXON’s adaptable nature, as the engine’s efficiency makes Sales & Marketing expenses less necessary to scale. Given the organization operated both privately and publicly for ten years without a focus on sales, this leads me to believe that this is a structural advantage, that is tied to Adam Foroughi’s vision for the org.
Truthfully, without an advanced LLM background, it’s hard to uncover where the advantage lies, as Unity also references a machine learning system. However, what we do know is that AppLovin runs a more contextual behavioral model, and chooses not to interface as much with sensitive consumer data. Thus, making them more insulated from regulation than social media platforms, like Meta. Additionally, in Q1 ’24, leadership discussed how AXON’s structure means that if the model becomes 2x as efficient overnight, the flow through does too. Adam Foroughi also said with confidence that “we could open-source the model tomorrow”, but the platform is only as good as the data that it can adapt, adjust and re-train. Finally, management reinforced that AXON is a highly sophisticated model where “it’s not conceivable that it can be replicated”. I will leave these phrases for interpretation, but what is apparent, is that game developers have gravitated to AppLovin, and are spending at a much more dramatic rate.
4. Scaled Advantages:
Part of what makes Google, Amazon, and Meta the best businesses in the world, are the scaled advantages that come with user engagement. Amazon strikes me as the most impressive, as they weren’t built with advertising in mind, however, were able to take their intimate understanding of consumer preferences and spending habits to enact one of the three largest advertising platforms on Earth. This is relevant to AppLovin, as 3rd party ad networks rely upon the “Walled Garden” for mediation, but will never receive their data in return. This becomes less important as user engagement grows, and AppLovin can rely upon the pre-established insights of their studio relationships. More importantly, these data streams feed back into AXON to ensure that the ML-platform has seen every kind of engagement, to improve its pricing for publishers, relevance to consumers, and automated mediation for developers, at the benefit of each party in the ecosystem. As AXON becomes more relevant, AppLovin may look more and more like Facebook one day, as the adverts are so customized to the user, that they are perceived as product discovery, instead of an invasive time sink.
We have already seen this take place through the lens of MAX, as it was paired with an acquisition subsidiary of Twitter, “MoPub”. Today, MAX is the largest mediation platform in the mobile gaming space, already contributing to margin enhancements.
Organizational Structure:
AppLovin is a dual-share structure in which Class A holders have one vote, with Class B shares bearing 20 votes per share. Co-Founder and CEO, Adam Foroughi owns 50.8% of the Class B shares and collectively 40.8% of the total voting power. The largest external threat is seen from KKR Denali Holdings, as they own 41.6% of the Class B shares for a total of 33.3% total voting power. See below for illustration:
Competitive Ad Networks:
According to Global News Wire, the mobile advertising market was valued at “USD $176.68 Billion in 2023 and is expected to reach a value of around USD 761.25 Billion by 2032, at a [CAGR] of about 24%”. Although the exact size of the market in 2024 is up for debate, what cannot be refuted are the tailwinds that will carry it for many years in the future. If we annualize Q1 ’24 sales of $1.058 Billion on a run rate basis, this means AppLovin has roughly ~2.2% market share (based on 2023 industry estimates). With that in mind, it’s no surprise that the mobile gaming ad industry brings many competitors with it.
Public:
Unity & IronSource (acquired by Unity in 2022)
AdMob (acquired by Google in 2009)
Digital Turbine ($APPS)
Zynga (acquired by TakeTwo Interactive in 2022)
Private:
Supercell
AdColony
StartApp
InMobi
Conclusion:
I feel confident in saying that Mr. Market rarely gives away companies like AppLovin this cheaply. Once again, this is not financial advice. However, I think this platform is advantaged in many ways that the market has begun to realize, but has failed to prescribe an appropriate multiple on today’s cash flows, let alone tomorrow’s! At current prices, you’re likely purchasing a hyper-scale industry leader with double digit industry tailwinds, optionality in different verticals, in its infancy, at around ~15x NTM FCF. Time will tell if this was truly a home run, but I will be comfortable holding $APP shares for many years to come, unless an unexpected tidal wave manages to change my underlying thesis.
Additional Resources:
George Vlasyev’s Video: LINK
Colossus & Adam Forroghi Video: LINK
Fortt Knox & Adam Foroughi Interview: LINK
Mobile Game Ad Networks: LINK
IronSource Ad Revenue: LINK
This Week in Startups Interview: LINK
Thank you for checking out my writeup! I hope you enjoyed, and feel free to subscribe (for Free) to receive new write-ups either to your email inbox, or through Substack.
God bless.