AppLovin - What am I missing

This is what an actual value stock looks like. The business is doing excellent and the PEG ratio is .59! Great earnings quarter but the market doesn't care. The earnings miss was only because of operational timing.

What about circle of competence? Are you able to evaluate their algorithms their moat depends on?

You don't need to, you can't predict the future. Look at their metrics, would they have the RoE, ROIC, Operating/Gross margins if they had no moat? Would they be increasing earnings with no moat?

This doesn't necessarily imply that they have a moat. Say I open a restaurant with strong RoE, ROIC, margins, etc. There is still the threat of someone opening the same kind of restaurant across the street. And yeah, you can't predict the future, but this is a very real risk that a lot of investors might not want to take.

You can't have a restaurant business with strong RoE, ROIC, and margins *beacause* they are low most businesses. Being in a competitive space naturally degrades those metrics.

Said the same thing above, but ultimately profitability does not mean defensibility. If you don't like the restaurant example, take a cyclical business. During boom times, their margins can sky-rocket, but in no way is this a moat.

This makes sense. I guess the stock is trading at a discount because of this. investors aren't sure that the company has a moat, or if it does, whether it would be easily outcompeted by its competitors in the future.

The best indication of a moat is margin.

Sure, but they are not one in the same. Profitability does not mean defensibility.

Yep. Never owned any shares but have been following the stock for a while. Last week I bought $4-5k worth of shares to hold onto.

I agree but I haven't do too much resource into this one. Any bear in the comments could give the bear outlook for APP at least in the next 5 years

I think people state that they're too reliant on the Google and Apple app stores as a risk factor, & that their execution and adoption in consumer/e-commerce vertical is sensitive and slow. I can't say too much about the reliance on app stores, but given that their core business model is based on mobile gaming performance marketing, I don't see how this could be optional. It's literally what's built them this $100B business. Regarding their pick up rate on consumer vertical being slow, the CEO addressed it by saying that they're not opening up to the masses and aggressively marketing to consumer companies. Rather, they're aiming at an ICP of mid-market companies who have budgeted marketing spend for quarters out and being methodical with who they target right now. He also shared that their Q3 outlook is strong and their machine learning optimizations kicked in right as their Q2 ended so it didn't reflect in their earnings. I bought during yesterday's dip and today's. I entered $10K at $339.64 yesterday, and additional $6K at $320.80 today.

their core business model is based on mobile gaming performance marketing

It just occurred to me that AI is making RAM and NAND expensive. That is killing new phone models. And that could be a major suppressor of this market if people are not buying new gaming phones.

Unity coming to take their business.

Cool story bro but Unity has shown for more than 20+ years that their management is clueless. They competed with Epic in game engines and lost out on all the profitable AAA license accounts. They managed to find a niche in the mobile game space early on which would give them a huge advantage as mobile games grew. But then Applovin came and took all the profits there too. Unity has no idea how to make money or build a business model.

Yes but Applovin is priced for perfection so any marginal improvement at Unity puts pressure on Applovin stock

How in the world is it priced for perfection?? Its TTM PE is 24 and its showing great growth. Looks like topline will grow 25%+ for the next year and even if that tapers to 18% then 15% over a couple years the stock is still trading cheap.

How in the world is it priced for perfection?? Its TTM PE is 24 and its showing great growth. Looks like topline will grow 25%+ for the next year and even if that tapers to 18% then 15% over a couple years the stock is still trading cheap.

They missed Q2 estimates and guidance for next quarter is only 3% QoQ growth. Market now wants them to prove they will have the reacceleration they’re claiming

Revenue: Expected at $2.055B – $2.085B, implying roughly 7.8% sequential growth.Adjusted EBITDA: Projected at $1.71B – $1.74B, pointing to a ~7.1% sequential increase. thats what I'm seeing. Maybe they said differently on the call?

Revenue was 1.92B last quarter. The guide of 2.055-2.085B is 3-4.5% sequential

You fail 2nd grade math.

My dyslexia read the guide as 2.025 🤦

That's still 5.4% increase, not 3-4.5% like you imply. Maybe you should just stop talking about stocks.

People just like saying stuff with out a care of whether it makes any sense or not.

Most finance people, including myself, would have a difficult time evaluating the competitive advantages of AppLovin. It’s a black box to me.

Axon (the AI tool) does competitive bidding for game ads allowing for a massive ROAS

I know what they do, I’ve read several years of filings and talked to both customers and employees. I just don’t understand why somebody else can’t do the same thing. Google and Meta have great ROAS but their competitive advantages isn’t in the ROAS, it’s in the network effects of instagram and customers preferring search/android. I can understand the competitive dynamics of those. For AppLovin, as far as I understand it, the ROAS *is* the competitive advantage. I don’t know how durable that competitive advantage is. Do the returns just collapse once somebody builds a better algorithm?

Not my vid, but covers the company pretty well: https://www.youtube.com/watch?v=_ApGDeLvs…

I feel like building a better algo is really hard, especially as it gets better as it gets more data.  ROAS seems like a really important competitive advantage

It's axon model that is the genie, that's their moat and their data of ad matching and relevance 

You have competitive advantages and then you have a ”moat”. A moat is what stops your competitive advantages from eroding over time. I don’t understand what AppLovins moat is. If another company builds a better model than Axon, will their customers just switch?

And how are competitors going to build a better model without data?

No they won't, lock in and network affects and data that gamers have already given app have tremendous value of recursive loophole of training and better monitoring and targeting their revenue speaks for the competency 

App SDK installs (ie the app owner installing software on the app) that power the underlying tech to measure, serve ads, target, and monetize. A mobile app developer wouldn’t switch unless there was a strong reason to do so

These are good questions to have, but you are ultimately misunderstanding how these models are built if this is what you think. And that's OK, if there's something you don't understand well, it's perfectly fine to skip out on this (though I do think applovin is massively undervalued right now). But I will give a brief extremely simplified overview of recommender systems to give context on why having all this data is a massive moat and it would be nearly impossible for a competitor to come in and create a better model. A human and a game are ultimately relatively abstract things that need to be quantified into math to create a model. Of course, you can have some structural features about people and the game (genre, etc), but these generally don't have enough information to capture connections to humans and game together. As a result, these recommender systems create embeddings of both human and gaming/ad. An embedding is a vector of numbers that quantifies who that person is. An easier example to illustrate what an embedding is is natural language which also uses embeddings. The 3 words "king", "queen", and "shopping" would all have different embeddings. Since king and queen are similar words, the euclidean distance between these two vectors would be smaller than the euclidean distance between king and shopping. similarly, in applovin case, similar users would have closer embeddings than different users. The way these embeddings are created is through looking at users and their previous interactions. So any new competitor would run into a massive cold start problem where they don't really have any data to even create this embedding. And even if they do get some advertisers to work with them despite the serious lower roas, these recommender systems are quite complicated and benefit massively from extremely high amounts of data (like LLMs but to a lesser degree). That's why this is in fact a moat.

Why can’t google or apple do the same given their data from appstores?

Apple can't they don't have this data and won't due to their self imposed privacy constraints. They stand more to lose than gain. Google is actually competing, primarily on android, but gaming is going heavily to applovin. Big reason is their data (or any app store data) is tangential but not the same for 2 reasons. 1. Auction visibility: Their ads operate mostly as an ad demand source or a standard ad network within gaming. Google only sees the auctions where its own ads participate. AppLovin sees the underlying price dynamics of the entire gaming marketplace. 2. Static store data vs in app telemetry: App store info is static on installs and purchases. AppLovin gets real time signals from inside the app (in the game's code). So the app store only sees the moment a user installs an app. The MAX SDK sees what happens inside the app (ad views, clicks, in app purchases).

Yes. If a competitor builds a superiror model, they'll start outbidding Axon and winning auctions. It's a pretty straightforward conceptually. Axon would be forced to raise their own bids, thereby suppressing their own spread between advertisers and publishers. The key question is how likely a competitor will develop a superior model.

anyone that thinks Axon is the moat doesn't understand APP's business. Mediation is their true moat, and given most gaming app pubs need to be on MAX to run their UA, no one can just steal it away. You need to talk to app publishers to understand why moving away from MAX isn't as simple as someone else can build the same thing.

Yes, this is part of it for sure. I would expand that statement a bit, as I think their moat has 3 important pieces. Trying to summarize briefly I would outline the moat as follows: AppLovin’s moat is built on a self-reinforcing data network effect, where its massive scale—processing billions of impressions across over a billion global users—allows its AXON deep-learning engine to consistently deliver industry-leading Return on Ad Spend (ROAS). They protect this algorithmic lead through high switching costs by bundling their user-acquisition engine with their MAX mediation platform, creating a closed-loop ecosystem that structurally locks in publishers. Finally, their strategic neutrality as an independent B2B vendor is an important part of the moat, creating a data trust barrier. Rival gaming conglomerates and Big Tech giants like Google and Meta are not trusted by app developers who don't want to give them user data they might use to scoop their business model or most valuable users. As evidence of this, even Google and Meta choose to pay tolls through AppLovin's exchange rather than competing directly with their own product in the niche.

So Google does not get the same data? Even when users use android and buy the game in their store?

Nope. Google def doesn’t get the mediation data that max has. APP can essentially see bidstream data for all imps at the mediation layer and match it to postback data to determine conversion probability. This is critical for fine tuning Axon and hence a differentiator. So in the gaming app ecosystem, this is an impenetrable advantage. Not to mention every competitor has to pay a 5% mediation fee so Axon can essentially be slightly inferior and still produce the same outcome. That plus the data advantage is critical. Obviously at the user level Meta and Google have user and intent data which is better, especially for ecomm. But APP only advertises on pubs that are on their mediation network…if they can scale ecomm is debatable but no reason to think their gaming dominance will diminish

Thanks for your comments, very helpful! I've been researching the company too these last few days.

Google has Admob, which is a competing in-app advertising product, but from my understanding it is not specialized, it is generalized to all categories. The presence of admob probably explains the market share of applovin: 40% in-app advertising on IOS, 20% on Android. But in gaming and tracking gamer behavior, no google does not get the data Applovin does, and that's why applovin can dominate and maintain their niche. This fact has made me wonder how successful the new ecomm expansion of applovin will be though. Remains to be seen, but I would doubt it will have the ROAS of meta/google, given their owning the platform advantages.

Google dominates Android. Almost all of AppLovin's revenue comes from iOS, their reach is Android is small and there is no true moat there. But that's nothing new lol, been like that for a decade.

Again, not true and people don’t understand how the mediation works. Publishers can’t have their android app on admob and iOS on APP. For Gaming, Max has almost 90% market share followed by Admob and Levelplay (both under 5% each). For non-gaming apps, admob and Google dominate 60%+ but Max is strong in vertical video/app categories. But for gaming, even on Android Max is the dominant mediation platform

I’m from the ad-tech industry. I don’t actually have any good intel about applovin. But, even as an industry insider it’s a black box to me too.

Online Ad market is getting saturated with so many players. AI agent based shopping will ignore ads and threaten ad-spend-ROI. 

Why?  Applovin has a monopoly on this & it is a growing industry.  No one else can compare with Axon here. 

Their ad channel is through gaming so theres going to be eyeballs , people won’t outsource their entertainment to an agent

Perhaps your missing the investigation they are under or the slow roll out that was the excuse. Also been downgraded to a hold by some.

If I remember, the investigation wasnt that concerning but I forgot about that and I will double check.   I was just looking into the analyst concerns!

Pretty sure CFO commented that it’s been resolved when I was reading the transcripts yesterday

The investigation has now been completely dropped and stock hasnt moved at all. This is crazy value

yes, SEC investigation is over

User acquisition costs are getting cheaper on major platforms with AI specific solutions. If you can’t match the ROI or ROAS that other big platforms provide, you risk losing ad revenue eventually. Unless they come out with an AI solution that beats META, Google or TikTok for user acquisition, it’s going to be difficult.

My personal anecdotal evidence evidence is that I get so frustrated with applovin ad loops on most apps, I’ll just delete them. Just my .02 :)

I’m selling asap

because the price today reflect 9 months forward. earnings are meaningless.

It's a gamble on e-commerce ramp and stagnation in e-commerce segment. Games are good but initial view to convert new niche in dominant leader ie Google and meta. No sec investigation so no overhang but still not stellar either way until proof of concept shows

I am buying them thats all I know, and I am selling puts as well at 300 and 280. I dont know if I end up with a real position or just a tiny one and some premium but I like it at this price.

Yep I sold a 300 csp the day it dropped after earnings and IV was through the roof. Used that premium today to buy some long dated 350 calls. Very confident in this play.

Brother the daily is screaming 300 to early for calls

Brought the dip yesterday feeling like the price movement post earnings was an overreaction, so I agree OP. Don't really see the catalyst for today's continuation down other than broader skepticism in digital / mobile ad space.

The reality is the stock is not trading on reason, it's trading on sentiment. And right now the knife is falling to unreasonable levels. That said, do you want to catch the falling knife and time the bottom, or just wait for the sellers to be exhausted and wait for it to bounce back. Sentiment is at all time low because people are scared of the narrative that even 30% yoy is not a guarantee. Impossible to say right now, but if it can even do 30% yoy for the long term, as management says, this should be a $500 stock right now.

Unity finally had a good quarter and Wall Street views this as unity eating app’s lunch

Nope. App was falling well before unity’s quarter. Changed nothing

Results were NOT good. Growth is slowing.

Your instincts are correct. You will get a lot of the usual cautious people here justifying the lows with some fluff, don’t listen to them and trust the valuation and growth metrics

Dropped again big today.. any reason?

Same, I’ve been buying for about a month or so.. just double downed on the last drop at $340 and more today at $320.

Ran too hot too fast

It is not an easy business to understand and for most of the investors it is really a black box and what excites investors is the metrics. A lot of the current sentiment is driven by the price action and ngaticity breeds negativity. The big fear is the big tech and that it could go the way of TTD

Digital Turbine