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Few industries have more failed businesses than ad tech. Even well established companies that have found their niche in the advertising ecosystem can still get decimated from technological or privacy changes. For a long time, it looked like AppLovin was going to be yet another one of those players, especially when Apple’s App Tracking Transparency changes were being implemented.

AppLovin was just coming off of a Covid-driven mobile gaming boom, having almost tripled revenues in a matter of a few years. However, their games business started to stutter and pending Apple iOS privacy changes would punish all mobile advertising players—even the mighty Facebook was warning they’d endure a $10 billion revenue headwind. To make matters worse, a leading game engine—Unity—was merging with ad tech player ironSource, giving AppLovin another formidable competitor.

While AppLovin’s stock may have been a “Covid darling”, achieving a ~$40 billion valuation at peak in 2021, their fortunes quickly reversed. Their stock would drop from over $110 a share to around ~$9 at the low, taking their market cap to below $4 billion: a ruthless >90% drop.

AppLovin’s response was simple: execution.

They rebuilt their ad model, taking advantage of the latest AI innovations, and rolled out AXON 2.0 in 2023. That year their advertising revenue growth re-accelerated, with record profitability growth coinciding. The business continued to boom in the following years, with revenues reaching ~$7bn LTM and stellar profit margins of 77%.

However, new threats are circling AppLovin with their extraordinary operating margins serving as an invitation to competitors. Unity has restructured their business and aggressively gone after AppLovin’s ads business. They have even gone as far as (allegedly) brazenly stealing data from AppLovin’s auctions, the discovery of which has now landed them in court. Despite the outcome of the litigation, there are already real signs that Unity is improving. And ad tech is a weird business in that you don’t have to actually lose business in order to become less profitable. Since ads are sold in auction, a competitor simply getting better can ruin the spread AppLovin currently makes on their ads.

So is AppLovin overearning currently with competition set to correct that? Investors certainly seem to be pricing in the possibility that their ad take-rates will compress. And their first ever earnings miss has only added fuel to those concerns. While management is guiding the business to still high growth rates (48% for next quarter) and talked about long-term growth of 20-30%, the market is pricing AppLovin as if something is severely wrong at just ~17x trailing earnings. So is the business breaking or is this an opportunity for an investor?

All of this and much more in our 118-page report! You can access it here. We hope you enjoy!

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If you are a member, you can access the AppLovin report here.

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AppLovin Table of Contents

1. Founding History
2. Business History
3. Business
4. Industry
5. Competition
   1. Google AdMob
   2. Unity ironSource
   3. Meta
   4. Apple
   5. Other Competition
6. AppLovin Model
7. ROIC and Capital Allocation
8. Valuation
9. Risks
10. Conclusion

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