AppLovin ($APP) Investment Thesis: Expensive, but Unstoppable?
AppLovin ($APP): a high-multiple stock backed by strong AI-driven growth and expanding margins...
Hi, Investor š
Iām Jimmy, and welcome to another free edition š of our newsletter. Today, weāre deep-diving into AppLovin ($APP) - a company thatās surged +400% over the past year, driven by AI-powered ad optimization and the strong growth of mobile advertising.
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Our deep dive is divided into twelve sections:
Sector Overview
The History of AppLovin
Corporate Governance
Business Model
AXON, The Heart of AppLovinās Platform
Main Segments
Value Proposition
Competitive Advantages & Landscape
Whatās Next?
Unit Economics: Revenue and Costs
Valuation
Main Risks & Investment Thesis
š Sector Overview:
The digital advertising market now dominates global ad spending, rapidly outpacing traditional media. In 2024, digital ad spend is estimated at $740.3 billion, an 8.9% increase from 2023. By 2028, it is expected to reach $965.6 billion, reinforcing its role as the primary growth driver.
This shift is fueled by changing consumer behavior, with more time spent on mobile devices, social media, and streaming platforms. Search advertising remains the largest segment, with $306.7 billion in projected spend this year, or 41.4% of total digital ad spending.
Mobile in-app advertising is among the fastest-growing segments, driven by higher smartphone penetration, app engagement, and programmatic ad adoption. Advertisers are shifting budgets to in-app placements, creating significant opportunities for ad tech platforms that optimize performance at scale.
Total Addressable Market (TAM) for mobile ad tech is massive, with mobile gaming alone generating over $100 billion in annual revenue.
The decline of traditional media, especially print newspapers and magazines, accelerated post-pandemic. In the US, digital now dominates media consumption, a trend mirrored globally as advertisers prioritize mobile, programmatic, and AI-driven ad platforms.
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š The History of AppLovin:
Founded in 2011, AppLovin started as a platform to help mobile developers acquire users and monetize apps.
The founders, themselves developers, identified the discovery and monetization challenge in the congested app ecosystem and built AppLovin Core Technologies to solve it.
2012: Launched AppDiscovery, its marketing solution, on Android and iOS.
2014: Opened its first international office in Europe.
2018: Expanded into mobile gaming with AppLovin Apps, acquiring PeopleFun and other studios.
2018: Acquired MAX, its ad mediation platform, to enhance monetization.
2020: Launched AXON, its AI-powered ad optimization engine.
2024: Sold its Apps business for $900M, becoming a pure-play AdTech company.
š Corporate Governance:
AppLovin's corporate governance structure includes a diverse Board of Directors and an experienced executive team, ensuring strategic oversight and operational efficiency.
Board of Directors:
The board is led by Adam Foroughi, co-founder and CEO of AppLovin since 2011. Other board members include Craig Billings, Herald Chen, Margaret Georgiadis, Alyssa Harvey Dawson, Barbara Messing, Todd Morgenfeld, Edward Oberwager, and Eduardo Vivas, each bringing expertise from various industries.
Adam Foroughi: CEO & Co-Founder
Adam Foroughi has been the driving force behind AppLovin since its founding. Under his leadership, the company evolved from a mobile ad network into a leading AI-driven adtech platform, helping app developers maximize monetization.
His deep understanding of adtech, machine learning, and mobile ecosystems has been key to AppLovinās rapid growth. Before founding AppLovin, Foroughi was a successful entrepreneur with ventures in mobile and online advertising.
Main Shareholders:
AppLovinās ownership structure includes a mix of institutional investors and insiders. Major shareholders include:
Adam Foroughi: holds approximately 11.4% of the company, reinforcing his significant influence over strategic decisions.
Tang Hao: owns 6.93% of shares.
Ling Tang: holds 6.13% of shares.
Andrew Karam: owns 5.86% of shares.
The Vanguard Group, Inc.: one of the largest asset managers, with 5.72% ownership.
š¼ Business Model:
AppLovin ($APP) operates at the intersection of (i) mobile advertising and (ii) app monetization, leveraging AI-driven technology to help developers acquire users and maximize revenue.
At its core, AppLovin is an ad tech company that provides sophisticated programmatic advertising solutions, offering tools that optimize user acquisition, ad monetization, and overall app growth.
Historically, the company divided its business into two segments: Advertising (previously called āSoftware Platformā) and Apps.
However, with the recent sale of its Apps portfolio, AppLovin has streamlined its operations, doubling down on its high-margin, scalable Advertising business. This shift marks the culmination of a multi-year strategy in which its owned apps served as a training ground to refine its AI-powered ad-serving algorithms.
At the heart of AppLovinās advertising business is AXON, its proprietary machine learning engine, which processes vast amounts of data to predict and optimize ad performance in real-time.
This AI-driven approach allows advertisers to target users more effectively while enabling developers to monetize their apps more efficiently - creating a virtuous cycle that benefits both sides of the ecosystem.
AppLovinās primary revenue streams now stem from:
Ad Network & Mediation (MAX);
User Acquisition (AppDiscovery);
First-Party Data & AI Optimization.
By focusing on AI-driven ad placement, real-time auctions, and developer monetization, AppLovin has established itself as a mission-critical player in the mobile ecosystem.
The companyās capital-light, highly scalable model allows it to grow efficiently, with increasing operating leverage as it expands its advertiser and developer base.
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š« AXON, The Heart of AppLovinās Platform:
AXON is AppLovinās proprietary machine learning engine, responsible for optimizing ad targeting, pricing, and campaign performance. First launched in 2020 and upgraded to AXON 2.0 in 2023, the system continuously refines itself using billions of data points from ad impressions, clicks, and user interactions.
AXON helps advertisers find high-value users while allowing developers to monetize their inventory more effectively.
It uses real-time bidding (RTB) and predictive modeling to optimize ad placement, ensuring that ads reach users who are most likely to convert.
The AI model was initially trained using first-party data from AppLovinās owned Apps portfolio, but it now operates independently after the divestiture.
š Main Segments:
Software (Advertising & Monetization Platform):
The Software Segment, now the core of AppLovinās business, provides AI-powered solutions to help app developers acquire users, optimize ad placements, and maximize revenue.
The company operates as a platform intermediary, connecting advertisers looking to reach mobile users with developers seeking to monetize their apps.
Revenue in this segment is primarily generated through fees paid by advertisers using AppLovinās platform to acquire users and drive engagement. The Software business includes several key components:
AppDiscovery: User Acquisition & Performance Marketing
AppDiscovery is AppLovinās demand-side platform (DSP), designed to help advertisers acquire users through programmatic advertising. It accounts for 65% of Software revenue.
It provides an automated, AI-driven interface for advertisers to bid on mobile ad placements across AppLovinās vast network of publishers.
The platform optimizes campaigns in real-time based on Return on Ad Spend (ROAS) and Lifetime Value (LTV) models, ensuring efficient allocation of ad budgets.
AppDiscovery operates on a cost-per-install (CPI) or cost-per-action (CPA) model, meaning advertisers only pay when users take a specific action (such as installing an app).
MAX: Monetization & Ad Mediation
MAX is AppLovinās ad mediation platform, enabling mobile publishers to maximize revenue from their ad inventory. It accounts for 25% of Software revenue.
It runs unified auctions where multiple ad networks bid simultaneously for each impression, ensuring that publishers get the highest possible price for their ad space.
MAX competes directly with Google AdMob and Meta Audience Network, offering developers a more transparent and competitive bidding environment.
The platform takes a revenue share from ad impressions, typically 20-30% of the publisherās ad revenue.
It is deeply integrated with AXON, meaning that the AI engine continuously refines ad targeting and pricing strategies based on real-time data.
Adjust: Attribution & Analytics
Adjust is AppLovinās mobile measurement platform (MMP), providing advertisers with insights into user acquisition and ad performance. It accounts for 10% of Software revenue.
It tracks which ads drive conversions, helping marketers optimize their campaigns.
The platform uses multi-touch attribution to analyze how different ads contribute to user engagement.
Adjust also offers fraud prevention tools, ensuring that advertisers donāt waste budget on fake installs or fraudulent activity.
Wurl: Connected TV (CTV) Expansion
In 2022, AppLovin acquired Wurl, a Connected TV (CTV) advertising platform, for ~$430 million.
Wurl distributes streaming video content and enables targeted advertising on smart TVs.
This acquisition marks AppLovinās expansion beyond mobile into CTV and digital video advertising, increasing its Total Addressable Market (TAM).
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Apps (Now Divested) ā 1P Mobile Gaming Portfolio:
Until early 2024, AppLovin operated a portfolio of 200+ mobile games across various genres, including casual, puzzle, card/casino, midcore, and hypercasual games.
These apps were developed through internal studios and acquisitions, such as PeopleFun, Belka Games, and Machine Zone.
Why Did AppLovin Own Apps?
The Apps business was never the companyās primary focus but served a strategic purpose:
It provided first-party data to train the AXON AI engine, improving its ability to target users effectively.
It created a closed-loop ecosystem, where AppLovin could experiment with different ad formats, game mechanics, and monetization strategies before rolling them out to third-party developers.
The segment generated revenue through in-app purchases (IAPs) and in-app advertising (IAA), but its margins were lower compared to the Software segment.
The Strategic Sale of Apps
In early 2024, AppLovin announced the sale of its Apps business for $900 million (3x EV/EBITDA 2024E), consisting of:
$400 million in equity from the acquiring company.
$500 million in cash, with an option for up to $250 million in financing.
With the sale, AppLovin fully exited the mobile gaming business, reinforcing its position as an AdTech pure play. The divestiture also:
Eliminated a conflict of interest with third-party developers, who previously saw AppLovin as both a partner and a competitor.
Allowed the company to focus entirely on its high-margin Software business.
Improved financial efficiency, as the Software segment has significantly higher operating leverage and scalability compared to gaming.
This sale didnāt happen overnight. By the end of 2022, AppLovin had already reduced its app studios from 20 to just 11.
From a revenue and profitability standpoint, Apps accounted for 44% of revenue and 15% of EBITDA.
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šÆ Value Proposition:
AppLovin's ($APP) value proposition revolves around four main principles:
Scalable User Acquisition:
AppLovin helps developers grow their apps efficiently with its AI-driven AppDiscovery platform. Using machine learning, it optimizes targeting and bidding strategies, ensuring developers reach the right audience at the lowest cost. This allows them to scale without overspending, freeing up resources for product improvements.
Beyond just installs, AppLovin focuses on quality engagement. The platform identifies users with high intent, ensuring that acquisition efforts translate into long-term retention and revenue. By continuously analyzing data, it helps developers attract valuable users rather than just increasing download numbers.
Maximized Monetization:
AppLovinās MAX platform boosts developer revenue with real-time bidding. Instead of traditional waterfall mediation, MAX ensures every ad impression is sold at the highest possible price. This leads to stronger monetization and more predictable earnings, allowing developers to focus on their core business.
MAX also offers flexibility and control, letting developers test ad formats and placements without hurting user experience. With AI-driven optimizations, the platform continuously maximizes ad revenue while keeping users engaged, balancing profitability with retention.
Data-Driven Optimization:
App growth isnāt just about acquiring users - itās about constantly improving performance. AppLovin provides real-time insights through custom dashboards, helping developers track user behavior, ad performance, and revenue trends. This data enables smarter decision-making and better campaign adjustments.
By integrating multiple data sources, AppLovin quickly identifies areas for improvement. Whether itās adjusting targeting, reallocating budgets, or testing new creatives, the platform ensures that marketing spend is always optimized for the best possible return.
Automation & Efficiency:
Managing user acquisition, monetization, and marketing at scale is complex, but AppLovin automates the process. Its AI-driven solutions handle ad operations, allowing developers to focus on building and improving their apps rather than micromanaging campaigns.
With automated campaign management, real-time bidding, and AI-driven insights, developers can execute highly effective growth strategies with minimal manual effort. This saves time, improves efficiency, and ensures that AppLovin remains an essential tool for scaling apps seamlessly.
āļø Competitive Landscape:
AppLovin operates in a fragmented yet highly competitive AdTech ecosystem, going head-to-head with giants like Meta (Facebook), Alphabet (Google), and Amazon. All things considered, itās a true David vs. Goliath battle.
While it has built one of the largest mobile in-app ad networks, advertisers typically diversify their spending across multiple platforms to minimize costs, making competition intense.
Big Tech Dominance: Google, Meta, and Amazon have deep integrations across digital advertising and own critical distribution channels, making it harder for AppLovin to gain market share.
Platform Dependency: AppLovin relies on Appleās App Store, Google Play, and Facebook for ad distribution. Any policy changes (such as privacy restrictions) can impact its business.
Privacy Regulations: Apple's App Tracking Transparency (ATT) and Google's Privacy Sandbox are reducing data access, making ad targeting more difficult.
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š° Competitive Advantages:
Despite competing against industry giants, AppLovin has established itself as a leading AdTech platform through a combination of AI-driven technology, developer-friendly tools, and a data-rich ecosystem.
Its key competitive advantages include:
1. AXON: AI-Powered Optimization:
AXONās machine learning continuously refines ad targeting and pricing, improving campaign efficiency.
Unlike competitors that rely on static ad placements, AppLovinās real-time optimization ensures better performance for advertisers and higher revenue for developers.
2. MAX: Best-in-Class Ad Mediation:
MAXās unified auction system increases transparency and competition, helping developers maximize ad revenue.
Unlike Google AdMob and Metaās closed ecosystems, MAX gives developers more control over their monetization strategy.
3. Vertical Integration & Scale:
With one of the largest mobile ad networks, AppLovin efficiently connects advertisers with publishers, creating a self-reinforcing ecosystem.
The combination of AppDiscovery (user acquisition) and MAX (monetization) makes it a one-stop shop for mobile developers.
4. Data & First-Party Insights:
While privacy changes impact all players, AppLovinās historical data from its owned apps and AI-driven modeling provide a strong foundation for ad targeting.
This data advantage allows for more effective user acquisition and higher ROI for advertisers.
5. Speed & Adaptability:
Unlike Meta and Google, AppLovin doesnāt depend on a single platform (e.g., search or social media).
Its ability to quickly adapt to privacy changes, ad trends, and new monetization models gives it an edge in an evolving market.
š® Whatās Next?
AppLovinās biggest challenge remains its dependence on Apple and Google. The companyās performance-based advertising model relies on tracking user behavior to serve highly targeted ads, but increasing privacy regulations are making this process more difficult.
Apple took the lead in 2021 with App Tracking Transparency (ATT), requiring users to opt-in for tracking. It also pushed SKAdNetwork (SKAN) as the new standard for measuring ad performance, restricting how much user data advertisers could access.
While Facebook was hit the hardest, smaller ad networks like AppLovin and ironSource adapted by using fingerprinting techniques (e.g., tracking IP addresses) to continue gathering data. This shift redirected ad spending from Facebook to companies like AppLovin.
However, Apple is now cracking down on fingerprinting, with stricter enforcement coming in 2024. If AppLovin is forced to rely only on SKAN, its machine learning models will need to be retrained, as 60-65% of users currently opt out of tracking.
A bigger risk is that Apple could eventually launch its own privacy-friendly ad network, competing directly with third-party platforms.
Google has been slower to impose privacy restrictions but is moving in the same direction. It is testing a new privacy framework that limits data collection by third-party ad networks while keeping an advantage for its own ad business.
As these changes take effect, AppLovin will need to adapt, while Googleās ad platform will likely continue to dominate thanks to its access to first-party user data.
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š¹ Unit Economics: Revenue and Costs
AppLovin operates in a high-margin, scalable AdTech model, where the core of its business is driven by advertiser spending, AI-driven optimization, and platform efficiency.
Its unit economics are shaped by the interplay between customer acquisition costs, ad monetization, and platform take rates, making it a capital-light and high-operating leverage business.
Revenue Model:
AppLovin primarily generates revenue from two key sources:
AppDiscovery (user acquisition); and
MAX (ad mediation).
In both cases, the company takes a cut of ad spend or earns a fee based on ad impressions and conversions.
Unlike traditional ad networks that rely solely on display ads, AppLovinās AI-driven model optimizes ad placement and pricing, increasing the overall efficiency of every advertising dollar spent.
Margins and Cost Structure:
Since AppLovin acts as a marketplace connecting advertisers and publishers, its gross margins are high, often exceeding 70%. The main variable cost comes from acquiring ad inventory and maintaining its AI-driven platform, AXON.
However, as ad volume increases, marginal costs decrease, leading to significant operating leverage.
That's what we've been seeing in the last few quarters...
Customer Acquisition & Retention:
A key aspect of AppLovinās unit economics is its ability to retain high-value advertisers. Since performance-based advertisers focus on ROI-driven ad spend, AppLovin benefits from repeat ad purchases and increasing ad budgets over time.
As AXON refines targeting, advertisers see higher returns, reinforcing a flywheel effect where better performance drives higher spending.
Take Rate & Pricing Power:
AppLovin earns revenue through a take rate on ad transactions within MAX and AppDiscovery.
While industry peers like Google and Meta benefit from proprietary first-party data, AppLovin differentiates itself by offering transparent bidding, AI-driven optimization, and better monetization tools.
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š Valuation:
I. Financial Performance:
AppLovin's financials reflect its evolution from a mobile ad network to a software-driven monetization platform. The company has shown strong revenue growth (almost +40% CAGR 5y), driven by its AI-powered AXON engine and strategic acquisitions.
Key metrics include expanding margins, rising free cash flow, and a shift toward higher-margin software revenue.
Like most SaaS companies in the market, AppLovin has reported gross margins above 60% for over five years - reaching 75% in 2024.
This scale extends across its entire business model, also reflecting higher profitability. In 2024, the net margin reached an impressive 33%, with $1.5 billion in net income. EPS was $4.53, compared to $0.98 in the previous year. This is operating leverage.
The current leverage stands at 1.5x ND/EBITDA, a solid level compared to the 6x the company reached in 2021. Back then, the issue wasnāt the absolute debt value, which has remained relatively stable since, but rather the pressure on EBITDA.
II. Multiples:
With a market cap of $91 billion, AppLovin ($APP) is trading at 59x trailing P/E (projected earnings for 2025E are expected to bring this multiple down to 39x).
The company currently trades at an EV/Sales ratio of 20x, supported by a solid ROIC of 25% (vs. 5Y average of 7,5%).
III. Main Estimates and Target Price:
We expect AppLovinās net revenue to grow at a 15% CAGR over the coming years, driven primarily by the continued expansion of its software business and the increasing efficiency of its AI-powered monetization engine.
However, in 2025, we anticipate relatively flat revenue due to the recent sale of its app business, making it difficult for software growth to fully offset the $1.5 billion revenue loss.
In the following years, this shift should translate into significantly higher margins, especially given the businessās profile. EBIT margin is expected to reach 72% in 2026, with $4.3 billion in operating income (vs. $2.3 billion in 2024).
Our DCF model estimates a fair value of $238 per share by the end of 2025E, implying a -12.1% downside from the current market price of $270 per share. We applied a 11.5% WACC and a 5.6% perpetual growth rate, driven by the company's strong reinvestment opportunities and high ROE.
In terms of multiples, we believe applying a 35x P/E (vs. the current 59x) is reasonable. This would imply a 2026E market cap of $107 billion, representing a 17.5% upside from the current market price.
That said, we still prefer the DCF approach - particularly due to the high share of value coming from perpetuity.
Our sensitivity matrix indicates that potential returns could range from -28.9% to +16.1%, depending on variations in growth rates and the cost of capital (WACC).
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ā ļø Main Risks:
Here are the main risks that could impact AppLovinās investment thesis:
Ad Market Dependence: A significant portion of AppLovinās revenue is tied to digital advertising. A slowdown in ad spend, particularly in mobile gaming, could impact revenue growth.
Platform Reliance: AppLovinās business heavily depends on platforms like Apple and Google. Changes in privacy policies, such as ATT (App Tracking Transparency), could pressure monetization efficiency.
Competitive Pressure: The adtech space is highly competitive, with strong players like Unity, ironSource, and Google Ads. If AppLovinās AXON engine underperforms or fails to maintain its edge, it could lose market share.
Revenue Transition Risk: The company recently divested its app business, shifting focus entirely to software. If software growth doesnāt scale fast enough, it could weigh on near-term revenue.
Regulatory and Geopolitical Risks: Increased scrutiny on ad targeting and potential regulations around data privacy could affect AppLovinās ability to optimize its AI-driven ad solutions.
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š” Investment Thesis: AppLovin ($APP)
AppLovin ($APP) represents a compelling investment opportunity in the rapidly evolving adtech and mobile monetization market.
For those looking to build a position in the stock, here are the key points of the investment thesis:
I. A Market Leader in High-Margin Sector:
AppLovin dominates mobile ad monetization through its AI-powered AXON engine. The company benefits from deep integrations with game studios and app developers, enabling precise ad targeting and superior monetization.
The global mobile ad market continues to expand, and AppLovin is well-positioned to capture this growth with its high-margin software segment, which now represents the majority of its revenue.
II. Resilient and Software-Driven Business Model:
Following the divestment of its app business, AppLovin is transitioning into a pure-play software company. This shift should drive margin expansion, with operational margins projected to reach 72% by 2026.
With an increasing share of recurring software revenue, AppLovinās business model is becoming more resilient, reducing volatility tied to mobile gaming performance.
III. Competitive Advantages:
AppLovinās core advantage lies in its proprietary AI technology. AXONās ability to optimize ad bidding and placement at scale gives it a significant edge over competitors.
The company also benefits from high switching costs, as developers deeply integrate AppLovinās tools into their monetization strategies, making it difficult to replace.
IV. Valuation and All Potential Optionalities:
Despite its strong fundamentals, AppLovinās valuation remains a key debate. Our DCF model suggests a fair value of $238 per share by 2025E, implying a -12.1% downside from current levels.
However, our model does not account for all potential optionalities for the business, which could include new M&A deals and product launches. Additionally, operating leverage could be even higher, pushing the target price to higher levels.
With strong competitive advantages, a high-margin software-driven model, and multiple growth levers, AppLovin ($APP) stands out as a compelling player in the adtech space.
Hope you enjoyed the content.
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See you next time!
Jimmy
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Itās always good to keep an eye on tech companiesā¦ especially now. Thanks for sharing, Jimmy!
To introduce some balance here, the bear case against AppLovin centers on allegations of ad fraud, misleading financial reporting, and unethical business practices.
AppLovin has been accused of using deceptive and predatory advertising practices. Reports claim that the company artificially inflates ad click-through rates and app download numbers through tactics like "backdoor installation schemes" and ads designed to click on themselves.
Short-sellers, including Culper Research, Fuzzy Panda Research and The Bear Cave allege that AppLovin's rapid growth is driven by "low-quality" revenue streams from fraudulent ad practices. They accuse it of reverse-engineering advertising data from Meta Platforms and violating app store policies by improperly acquiring user data to boost its revenue growth numbers. I would recommend reading these reports prior to investing.
The company is under scrutiny for allegedly concealing material adverse facts about its AXON 2.0 platform while presenting overly optimistic financial results to investors. Critics argue that these misrepresentations inflated investor confidence in the company's profitability, which explains why the share price was so high and has now largely corrected. This reflects growing investor skepticism about the company's business model, risk profile and future prospects.
A class-action lawsuit has been filed on behalf of investors, alleging that AppLovin misled them about its financial stability and business practices during the period from May 2023 to February 2025. The lawsuits also highlight claims of unethical data practices and violations of laws protecting user privacy, including accusations of tracking children's devices in violation of Apple and Google policies.
Caveat Emptor!