New Highs & Why I Am Lovin Mysterious Applovin

Chartists have names for everything. This is a pattern called an Extended-V Reversal. Usually, the extension comes at the end, this one comes at the beginning. It is a powerful pattern often occurring early in a multiyear uptrend.

It exemplifies Buffett’s comment about investors as manic-depressives. In hindsight, the fall from over $100 to under $10 in a year looks absurd.

Great stocks have their day in the sun, a period of hypergrowth that takes them to a whole new level. Applovin is having its day in the sun.

We had another fantastic quarter in Q3. Our AXON models continue to improve through self-learning and, more importantly this quarter, from technology enhancements by our engineering team. As we continue to improve our models our advertising partners are able to successfully spend at a greater scale. We’re proud to be a catalyst to reinvigorating growth in our industry. In the third quarter, we generated revenue of $1.20bn (+39pc year-over-year), net income of $434m (+300pc year-over-year) at a net margin of 36pc, and adjusted EBITDA of $722m (+72pc year-over-year) at an adjusted EBITDA margin of 60pc. We generated net cash from operating activities of $551m (+177pc year-over-year) and free cash flow of $545m (+182pc year-over-year). At the end of 3Q24, we had $568m in cash and cash equivalents and 335m shares of our class A and class B common stock outstanding. Our software platform revenue grew in the third quarter to $835m (+66pc year-over-year) and software platform adjusted EBITDA expanded to $653m (+79pc year-over-year) at an adjusted EBITDA margin of 78pc. During the third quarter, we retired and withheld a total of 5.0m shares of our class A common stock for a total cost of $437m. Given our confidence in AppLovin’s future, our board of directors has increased our share repurchase authorization by an incremental $2.0bn, increasing our total aggregate remaining authorization to $2.3bn, with future repurchases to be funded from free cash flow.

Shareholders Letter, Applovin, Q3 2024, 6 November 2024

Innovation lies at the heart of Apploivin’s success.

AXON’s continued growth demonstrates our team’s ability to consistently drive improvement in our technology. Our investments are enabling us to facilitate growth across the entire advertising ecosystem we support.

Shareholders Letter, Applovin, Q3 2024, 6 November 2024

I have found somebody who understands Applovin a great deal better than I do.

In a year where Nvidia’s rise to prominence as an AI chip powerhouse has dominated tech headlines, a lesser-known juggernaut is quietly stealing the show. AppLovin, an ad-tech company specializing in mobile gaming, has skyrocketed 310pc in 2024, far surpassing even the mightiest players like Nvidia, which itself saw an impressive 173pc climb. Founded just over a decade ago, AppLovin has emerged from the shadow of its early gaming days to become the biggest growth story on Wall Street. With an earnings report on the horizon, expectations are higher than ever, and the stakes couldn’t be greater.

AppLovin’s story began modestly, but its trajectory shifted when it harnessed the power of artificial intelligence to supercharge its ad-tech capabilities. Going public in 2021 amidst a pandemic-induced boom in online gaming, the company’s early identity was rooted in game development. Today, its true strength lies in a high-tech advertising engine known as AXON, which has fundamentally redefined mobile ad targeting. The launch of AXON 2.0 proved transformative, fueling a sharp pivot from gaming revenues to robust growth in digital advertising.

AppLovin’s financials tell the story of a company on a winning streak. For its upcoming third-quarter earnings report, analysts anticipate revenue growth of 31pc to hit $1.13bn—following consecutive quarters where growth exceeded 40pc. Even more striking, earnings per share (EPS) are forecasted to more than triple, reaching 92 cents. Operating income is also set to more than double to $424.2m..

But the numbers that have truly captivated Wall Street are those tied to the software segment. In Q2 2024, AppLovin’s software revenue surged by 75pc to $711m, making up the lion’s share of its total sales. This rapid ascent underscores a strategic transformation: from game developer to AI-driven ad-tech leader.

 At the core of AppLovin’s success is AXON, an AI-powered platform that optimizes ad delivery through continuous learning and data refinement. AXON 2.0, rolled out last year, has been a game-changer. It has bolstered user engagement and increased ad effectiveness, drawing major clients and generating consistent growth.

“AXON enhancements through ongoing self-learning and our dedicated development efforts have fueled robust business performance this quarter,” the company stated in its August shareholder letter. The platform’s capacity to make smarter, faster ad decisions has resonated with developers and brands seeking to maximize returns in a competitive market.

Wedbush analysts have also chimed in, projecting that the mobile gaming ad market will balloon from $10bn to $50bn over the next decade. They see AppLovin as uniquely positioned to capture a sizable chunk of this growth as advertisers pivot away from traditional channels like social media and legacy TV, seeking more targeted and data-driven mobile advertising solutions.

Founder and CEO Adam Foroughi has been the architect of AppLovin’s success. His foresight in pivoting from a gaming-centric model to an AI-driven ad-tech leader has paid dividends, both for the company and for himself. With his stake now worth around $5bn, Foroughi stands as a testament to entrepreneurial resilience and strategic boldness.

As the company looks ahead, the question remains: can AppLovin maintain this level of growth and innovation? Its AI-driven approach has certainly set a high bar, and the expected influx of ad dollars into mobile gaming is promising. However, maintaining its lead against well-capitalized rivals and adapting to potential shifts in platform policies will be crucial.

AppLovin’s meteoric rise in 2024 is more than just a tale of impressive numbers; it’s a story of strategic reinvention and technological prowess. With earnings on the horizon, all eyes are on this ad-tech titan to see if it can prove that its rally is not just justified, but the beginning of a new era in mobile advertising. As AI continues to reshape industries, AppLovin’s ability to stay ahead of the curve will determine if it remains a Wall Street darling or faces a new chapter of challenges.

For now, one thing is clear: AppLovin is not just playing the game—it’s rewriting the rules.

CEO Today, 4 November 2024

The article in CEO Today was published before Applovin released its Q3 2024 results on 6 November, putting another rocket under the shares. It still leaves me vague about what AXON is all about.

Let us start at the beginning.

Each neuron in your brain has one long cable that snakes away from the main part of the cell. This cable, several times thinner than a human hair, is called an axon, and it is where electrical impulses from the neuron travel away to be received by other neurons.

Queensland Brain Institute, the University of Queensland

It is not easy to unpick the mystery.

During AppLovin’s Q4 earnings call earlier this week, an investor asked CEO Adam Foroughi to explain how Axon 2.0 differs from the original Axon.

Axon 2.0 is an updated version of AppLovin’s AI-powered ad tech software. It was released last year and relies on predictive machine learning to target app-install ads to the users most likely to download those apps.

Foroughi’s answer was illuminating because of how unilluminating it was.

“It’s just better,” he said, adding that the technology is built to support more scale and be more efficient and effective.

But that doesn’t tell you much about the how.

Artificial Intelligence, Allison Schiff, 16 February 2024

What matters to advertisers is that Axon 2 works.

Most AI-based ad buying and targeting tools aren’t known for their transparency. Some products, like Google’s Performance Max and Meta’s Advantage+ Shopping Campaigns, have become almost synonymous with black boxes.

But not all ad buyers care about what’s happening in a platform’s guts, so long as they reach their campaign goals.

“As a direct marketer, I don’t even need to know the fundamental mechanics behind it if I understand whether it works or not,” Milo McMahon, founder of Outdoor eCommerce, an agency that helps outdoor and apparel brands grow their sales online, told AdExchanger last year in reference to Advantage+.

The mobile app developers who make up AppLovin’s target market worship at the altar of campaign performance – and they don’t operate on a fixed budget. They buy on a performance basis.

In other words, if performance marketers can prove that a tactic or platform is working, they’ll continue expanding their spending ad infinitum.

That’s why the details of what, exactly, makes Axon 2.0 better than Axon 1.0 probably don’t matter to most of AppLovin customers. Black box or no, the Axon 2.0 flywheel will keep spinning for AppLovin as long as advertisers keep seeing the value.

So far, they seem to be. In Q4, AppLovin’s software platform revenue, underpinned by its ongoing investment in Axon 2.0, was $576m, up 88pc YOY at a 73pc margin.

And in its shareholder letter, AppLovin pointed to Axon 2.0 as a driver of its software platform revenue growth and said the company “saw advertisers spend more as a result of improved performance from our AI-enhanced advertising engine.”

Foroughi drew an analogy between Axon 2.0 and the opaque yet popular ChatGPT.

Although most people don’t know exactly how the technology works, they do know ChatGPT-4 is better than ChatGPT-3.5, and when it’s released later this year, ChatGPT-5 will be better than ChatGPT-4. They know this because when they type a prompt into the chatbox, they get a “better” result.

Axon 2.0, Foroughi said, is similar.

“We can’t see into a black-box algorithm,” he said. “[But] there’s a whole bunch of predictions along the way, and Axon 2.0 makes them better than the prior version. That creates efficiency gains both for our business and that of our partners.”

Artificial Intelligence, Allison Schiff, 16 February 2024

Applovin is also excited about e-commerce as a new vertical, which looks like an important ‘something new’.

AppLovin has also cracked into e-commerce as a new vertical, and plans to scale its bets there in 2025. 

“Early data has exceeded our expectations, with the advertisers in the pilot seeing substantial returns, often surpassing those from other media channels, and in many cases, experiencing nearly 100pc incrementality from our traffic,” said Foroughi of e-commerce on the call. 

While the executive noted that e-commerce’s impact on revenue is not yet material, he reported that the offering is the company’s fastest-growing area.

AppLovin has shifted staff from other projects to its e-commerce team and made efforts to streamline its resources to support a promising initiative. AppLovin in April helped social commerce platform Flip relaunch its marketing platform for brands with Axon technology, along with investing $50m in a Series C funding round for the startup.  

Marketing Dive, 8 November 2024

No wonder I struggle to understand this company. Even the CEO seems baffled by their success.

More on AXON

One of the key drivers behind AppLovin’s recent success is its AI-powered ad engine, AXON.

AXON plays a crucial role in enhancing the efficiency of mobile advertising by conducting real-time auctions and helping advertisers target the right users with precision.

The technology is particularly effective in user acquisition and engagement, two critical factors for advertisers seeking to maximize return on ad spend.

Since the introduction of AXON 2.0, AppLovin has seen substantial growth in its ad-related revenue streams.

For example, AppDiscovery installations grew by 82pc on average in 2024, a significant leap from the previous year’s growth of just 17pc.

AppLovin’s strong profitability and operating leverage are driven by its focus on the software platform, which now accounts for nearly two-thirds of its revenue.

The shift toward a software-centric model, powered by AI, has allowed the company to achieve a 65pc Uniform return on assets (ROA) and 15pc asset growth last year.

Valens Research, 11 October 2024

Prospects look exciting.

AppLovin has taken proactive steps to diversify its business model and reduce its dependence on mobile gaming apps.

The company’s strategic expansion beyond gaming into other verticals, such as e-commerce and connected TV (CTV) advertising, positions it to capture new, high-growth opportunities in broader markets.

While AppLovin faces some market headwinds and challenges related to its financial leverage, the company’s strategic diversification efforts, AI-powered technology, and strong cash flow generation position it well for continued growth.

As it expands into new verticals and leverages its data-driven marketing engine, AppLovin could unlock significant upside, making it a compelling investment opportunity.

Valens Research, 11 October 2024

Share Recommendations (21 December 2024)

Applovin. APP

Strategy – Add To Holdings On New Highs

Here is a simple investment strategy. Buy a share you like, ideally with great potential, and add to your holdings every time the share makes a new high. You need the right share but if you find it the returns could be stratospheric.

I realise there is an answer to how to buy exciting shares cheaply. Hold them until they become cheap. In the 1990s Amazon was on an out-of-sight valuation, ditto for Google as it then was in the early 2000s but those purchases turned out to be at fabulously low prices. Time changes everything.