AppLovin Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

AppLovin is a mobile app technology company that provides a software platform for developers to grow and monetize their apps. Its Software Platform comprises a marketplace for mobile app advertising; app discovery tools (AppDiscovery), and a cloud-based platform (MAX) for automating and optimizing advertising campaigns.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

AppLovin operates in the rapidly evolving mobile app ecosystem, primarily targeting developers, both large and small, who are looking to monetize their applications through advertising. The company’s core Software Platform is designed to help these developers grow their user base and revenue, while also assisting advertisers in reaching their desired audiences.

Revenue Distribution: AppLovin’s revenue streams primarily flow from two sources:

  1. Software Platform Revenue: This segment includes revenue generated by providing a platform (Software Platform) for mobile app developers to monetize their applications through advertising. It represents the bulk of the company’s revenues, with 66% of total revenues in the latest quarter (Sept 30, 2024). The revenue in this segment grew year-over-year to $684m.
    • App Platform Revenue is further segmented into revenue from its mediation solution (MAX) and the revenue from its software solutions, both of which work together to optimize the advertising experience and maximize revenue for mobile developers.
    • MAX revenue is driven by a combination of factors that include app install activity, advertising impressions, and effective monetization strategies, and a huge increase in its capabilities, mainly in AI.
  2. Apps Revenue: This segment consists of revenue generated by mobile games, which are primarily free-to-play games. The company earns revenue primarily through in-app advertising, and in-app purchases. This segment is much smaller than the Software Platform, accounting for 32% of total revenue, reaching $332m in the latest quarter.
    • The App segment is very volatile and dependent on its user base in different genres of games, mainly in mobile-gaming.

Industry Trends:

  • Mobile App Ecosystem Growth: The mobile app market continues to expand, driven by a growing number of smartphone users.
  • Increasing Need for App Monetization: As more developers create apps, the need for effective monetization solutions intensifies.
  • Emphasis on Mobile Advertising: Digital advertising is shifting heavily towards mobile, making it a primary focus for marketing budgets.
  • Programmatic Advertising: Increasing reliance on programmatic buying in the advertising marketplace is expected to help increase the efficiency of operations.
  • AI-Powered Advertising: AI is starting to impact mobile advertisement, as are new regulations aimed at data privacy.

Competitive Landscape: The mobile advertising technology space is highly competitive, with the following as some notable competitors:

  • Google AdMob: A major player in ad mediation and demand, also a core part of Alphabet’s overall offerings.
  • Meta Audience Network: Provides advertising platform for reaching users across Facebook and Instagram apps.
  • Unity Ads: Another major ad provider with strong capabilities for monetization in gaming applications.
  • IronSource (now part of Unity): Is another major player for ad mediation, especially in mobile gaming.

AppLovin seeks to differentiate itself through their robust software platform, in addition to a focus on high growth and high-value mobile gaming.

What Makes AppLovin Different?:

  • Integrated Platform: Unlike many competitors which offer only point solutions, AppLovin offers a fully integrated platform across its software and app segments, allowing developers to simultaneously grow their app and monetize it.
  • Emphasis on AI Technologies: AppLovin has been investing heavily in AI for better ad management, optimization, and bidding process, giving them an edge over more traditional approaches, but has a high learning curve.
  • Performance-Based Focus: AppLovin’s focus is largely on using performance-based metrics to guide investment decisions.

Financial Analysis

AppLovin’s financials, while exhibiting some volatility, reflect a company in the process of scaling and establishing dominance in specific niches.

Latest Reports: Based on the third quarter results of 2024, which ended in September 30:

  • Revenue: AppLovin’s total revenue grew 15% year-over-year to $1,016 million, with Software Platform revenue at $684 million and App revenue at $332 million. The company has made big improvements in its mobile gaming segments, but the Software Platform revenues are still the majority.
  • Gross Margin: Gross profits grew 22.9% year-over-year to $779.2 million, showing improvements on its costs, especially with the adoption of new technologies.
  • Adjusted EBITDA: Adjusted EBITDA grew 34.8% year-over-year to $415.9 million, highlighting margin expansion and improvements in profitability. This is a key metric that measures the company’s operational profitability.
  • Free Cash Flow: Generated free cash flow of $469 million, compared with $262 million in the same period in 2022, showing large improvements.
  • EPS: EPS has improved YoY, from a diluted loss of $0.01 to EPS of $0.09 for the quarter.
  • Revenues in Q3: $1.016 billion
  • Net income in Q3: $108.6 million
  • Cash from ops: $287.6 million
  • Debt: $3.1 billion with a mix of fixed and variable interest rates
  • Stock repurchase: $447.9 million (In the three months ended September 30, 2023, the Company repurchased 8,554,738 shares of Class A common stock for an aggregate of $196.5 million. Since then through September 30, 2024, the Company has repurchased an additional 13,035,704 shares of Class A common stock for an aggregate of $447.9 million. They also have a remaining authorization of $1.8 billion for future repurchases).

Historical Trends:

  • Revenue Growth: The company experienced rapid growth in its initial years. More recently, however, growth has moderated. There is a significant increase in revenues compared with 2022.
  • Profitability: Over time, profitability seems to improve after a period of losses. This comes from efficiency gains and a greater adoption of higher margin services.
  • Liquidity: The company currently maintains substantial cash and marketable securities balance, which gives them a lot of runway and flexibility.

Balance Sheet Health: 4/5

AppLovin has a relatively healthy balance sheet with a strong amount of cash, but also a significant amount of debt, making it not perfect.

  • Assets: The company’s assets are a mix of cash, investments and intangible assets. The biggest portion is property and equipment, at over $1.5 billion dollars. While other assets such as cash and cash equivalents total around $900 million. Intangibles are about $2.4 billion on net.
  • Liabilities: Total liabilities are $3.474 Billion. The company also has debt and other liabilities, which represents a large chunk of total capital.
  • Equity: Total shareholders’ equity, at $5,462,484 million, signifies the net asset value owned by shareholders and that value is bigger than its total liabilities, meaning it is overall healthy and not overleveraged.
  • Debt: AppLovin has long-term debt of over 3.1 billion dollars (with about 250 million in short term obligations). However, they are maintaining an investment-grade rating, which is good. And while debt is significant, the company has enough revenue streams to easily sustain those.
  • There have been substantial repurchases made in the last few quarters as well.

Risks

AppLovin faces a number of risks that could potentially damage its moat or performance:

  • Reliance on a Few Platforms: AppLovin relies heavily on the Apple App Store and Google Play Store for distribution and monetization. Changes in policies by these platforms could significantly affect AppLovin’s business.
  • Dependence on User Acquisition: AppLovin is dependent on app developers being able to acquire users. Changes in advertising policies or regulations could hurt the acquisition model.
  • Market Volatility: The mobile ad market is subject to frequent changes in ad spending, user preferences, and technology.
  • Technological Disruption: The technology landscape is always shifting, and new technologies like AI can quickly diminish the moat of current strategies. This is especially threatening to companies that sell technology such as AppLovin.
  • Regulatory Changes: With increasing attention on data privacy, regulations like GDPR and CCPA may restrict the ability of advertisers to gather and analyze user data, thereby reducing the effectiveness of app monetization.
  • Competition: The mobile ad space is crowded and competitive, and new entrants are constantly trying to innovate and gain market share, which can pressure AppLovin’s profitability.
  • Volatility of Mobile Gaming Segment: This segment is prone to changing user preferences and is heavily impacted by changes in the preferences of mobile gamers.
  • Failure to Properly Integrate Acquisition: Companies acquired by AppLovin may not be integrated well, potentially causing unexpected costs or failure of the acquisition.

Business Resilience

Despite the above risks, AppLovin shows some signs of business resilience:

  • Diverse Revenue Sources: The company’s revenue streams from both its software platform and mobile games can help them to offset adverse conditions if revenue is diminished in one segment.
  • Investment in Innovation: The continued development of AI-powered advertising solutions, and the ongoing development and release of new apps suggests the company is aware of the need to stay on the cutting edge.
  • Experienced Management Team: While management may not be the largest factor in its long term success, a good management team should steer the company well through tough waters.

Understandability Rating: 3 / 5

AppLovin’s business model is easy enough to grasp from the surface, but understanding all the levers of revenue and the many complexities of mobile marketing can be difficult.

  • The basic premise of helping developers is easily understandable.
  • The company’s financial statements can get a bit complex when evaluating acquisitions and various financial instruments.
  • The ever-changing nature of the mobile ad space is difficult to fully grasp.

Conclusion

AppLovin appears to have some good qualities that allow it to maintain a moat but there are also many reasons why that moat can easily erode. It is a profitable company with high growth but does not have complete control of its success because it relies on the market. The management seems to have a good strategy to continue to be competitive in the future but whether that plan is successful or not is a big unknown. This is a company that deserves more research before being considered.

company name (ticker symbol) | Moat: / 5 | Understandability: / 5 | Balance Sheet Health: / 5

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