I've seen many articles and videos on AppLovin that seem very bullish, and I get it. Growing revenue by 60-70% and a P/E of 25 seem intriguing, so I looked into it a bit deeper.
The business is capitalizing on its gaming mobile ad moat related to iOS (as Apple changed the policy allowing users to opt out of tracking behaviour), because it owns Max SDK (a software developer kit, that allows game developers to add ads in the games and monetize the product).
Through Max SDK, AppLovin gets insights about users' behavior and can judge the value of an ad better and bid accordingly (better than Meta/Google).
But what doesn't get discussed is the drivers behind the revenue growth. It used to be a mix between installations (basically, when players of Game A install game B) and higher installation price. Now all the growth comes from higher installation price (charging advertisers more). This higher price can be justified, as the underlying model that does the bid gets better, but it has a ceiling.
Its iOS share went from 37% to 44%, but its Android share remains at \~23% (where the identifier still exists).
There was a report that, as is, AppLovin delivers \~45% better return than Meta. Let's assume that is the case. If this gap is closed, the current $6.8b revenue can turn into $10b.
With 60% net profit margin, and a 14x multiple, that's \~$75b (I discount the value, as this growth will take a few years, and I also take the value generated by then into account).
The market cap is \~$110b.
So, there's a gap of $35b that the market expects to be filled by other new markets.
I dislike that the management doesn't disclose more information. I'd expect, at minimum, ad spend and division of revenue by segment. I have no idea if gaming is 60% or 90%.
Now, where is the $35b coming from? The management aims for:
\- Non-gaming apps (difficult to get a big market share there)
\- Ads on the open web
\- Connected TV
In all of these areas, AppLovin has NO advantage, and it is crowded (Google, Meta, TikTok, Snap, The Trade Desk, Roku, etc). The company also has no out-of-the-box video creative, so there are a lot of improvements required to even compete.
Lastly, the management mentions that the gaming growth isn't sustainable at 20-30% for 10 years, and expects that in the next 3-5 years, the consumer side converges (gaming decelerates, and the remaining part accelerates). Based on that expectation, the management feels very comfortable with investors expecting 20-30% growth for a very extended period.
Now, I don't fully buy this, because if the company grows for 20% per year, for a decade, its revenue will be $42b. If its take rate is 30%, that means, $140b ad spend should go through it (which will be more than 12% market share). That market share is bigger than what Amazon has today.
Personally, I don't think this segment is worth $35b as the company hasn't proven it can execute yet.
If the market cap was \~$80b, I would've been a buyer. Not at today's rate.
I'm sharing all my thoughts for free.
Blog: [https://thefinancecorner.substack.com/p/applovin-looks-cheap-is-it](https://thefinancecorner.substack.com/p/applovin-looks-cheap-is-it)
Video: [https://youtu.be/FNFSGtIpNkk](https://youtu.be/FNFSGtIpNkk)
Feedback is always welcome.
