The Power Of V-Shaped Reversals – Applovin & Carvana

A V-shaped reversal looks like what it sounds. The chart makes a V. It is a strong pattern that can dramatically increase levels. It is a shape that leaves buyers continually behind the curve because the price keeps blasting higher. The previous sell-off shakes out all the loose holders so nobody is left to sell.

The ideal time to buy is when the moving average turns higher but at that time there is no sign of the V-shaped reversal pattern. This chart shows the price moving effortlessly through resistance from the previous peak, which points to higher levels.

I started writing this piece when Applovin was $123 but never published it. The problem was that I struggled to understand what they do although I suspect this stock could be a monster winner.

Below is what Wikipedia says about Applovin.

AppLovin Corporation is an American mobile technology company headquartered in Palo Alto, California.^[3] Founded in 2012, it operated in stealth mode until 2014.^[4] AppLovin enables developers of all sizes to market, monetise, analyse and publish their apps through its mobile advertising, marketing, and analytics platforms MAX, AppDiscovery, and SparkLabs. AppLovin operates Lion Studios, which works with game developers to promote and publish their mobile games. AppLovin also has large investments in various mobile game publishers. In 2020, 49pc of AppLovin’s revenue came from businesses using its software and 51pc from consumers making in-app purchases.^[5]

Wikipedia

Despite my enthusiasm for technology companies the world of technology is a mystery to me. I can barely operate a mobile phone and routinely stop strangers in the street, who pull out their phones to do things which I could presumably do on my own phone.

There appears to be an exciting ‘something new’ happening at Applovin.

In the second quarter of 2024, we celebrated the first anniversary of our enhanced AXON technology. Reflecting on the past year, we’re thrilled by the significant growth AXON drove for our advertising partners. AXON enhancements through ongoing self-learning and our dedicated development efforts have fueled robust business performance this quarter. In the second quarter, we generated revenue of $1.08bn (+44pc yr/yr), net income of $310m (+286pc yr/yr) at a net margin of 29pc, and Adjusted EBITDA of $601m (+80pc yr/yr) at an Adjusted EBITDA margin of 56pc. Net cash from operating activities was $455m (+98pc yr/ yr), with Free Cash Flow of $446m (+102pc yr/yr). At the end of 2Q24, we had $460m in cash and cash equivalents and approximately 334m shares of our Class A and Class B common stock outstanding. Our Software Platform revenue grew consecutively in Q2 to $711m (+75pc yr/yr), with Software Platform Adjusted EBITDA expanding from last quarter to $520m (+91pc yr/yr) at an Adjusted EBITDA margin of 73pc. During the second quarter, we continued our share management activities, withholding a total of approximately 4.2m shares of our Class A common stock for a total cost of $356m in connection with net share settlement of vested equity awards. We also have approximately $500m remaining under our $1.25bn share repurchase authorization as of August 7th.

Applovin, Q2 2024, Shareholder Letter, 7 August 2024

AI Transforming Applovin

Axon seems to be a big deal. Looking back to 2023 I found this about Applovin’s AI-focused approach.

AI techniques have already made a big impact on the ad tech industry. By using methods to create intelligent systems that learn and problem-solve, AI systems are performing tasks that have historically required human intelligence. 

At AppLovin, we are using AI to replace human operations (like targeting, setting bids, learning phases, and more) that either our team or our partners used to have to make manually. These updates allow our partners to achieve their goals with greater accuracy and speed on an exponentially larger scale while saving them time and improving their operational efficiency. 

We have been working to upgrade our advertising algorithm with the latest AI techniques. Today, I’m thrilled to share more about the early results and the impact they are already making for our partners. Our advertisers are able to benefit from increased automation and recognize better ROAS (return on ad spend), at a much larger scale. 

Peak Games, a leading global mobile games studio and creator of mega hits, Toon Blast and Toy Blast, has already seen success: “With the recent AI advancements, we saw substantial growth in our ROAS campaigns with AppLovin.”

DealDash, a long-standing online auction and shopping platform with more than 20M registered customers says, “AppLovin has played a crucial role in doubling our digital UA volume and has also allowed us to break free from previous seasonal trends. Their AI-powered campaigns and unparalleled support have helped us achieve remarkable efficiency. Working with the AppLovin team has been a refreshing experience, setting new standards for excellence in our partnerships.”

These new techniques have played a role in advancing several of AppDiscovery’s key features and I’m excited to share, in greater detail, what this means for our solution and for the partners who use it. 

We have improved the automation and expansion of AppDiscovery campaigns, enabling our system to execute thousands of real-time optimizations based on the down-funnel actions you care about most. This reduces the risk of human error and saves teams time to focus on strategic work that drives businesses forward. “AppLovin is our top UA source and the recent AI advancements to AppDiscovery from AppLovin have changed the

Below are several specific AI-driven enhancements that are already improving outcomes for AppDiscovery partners:

• Greater automation: More accurately determines where to spend to best deliver on your performance goals – across geos, devices, apps, and more. The need for manual optimization and campaign filtering is effectively eliminated, resulting in increased efficiency for advertisers of all sizes.

One company that has already seen benefits from AppDiscovery and its automation is MoneyLion, a financial technology company with a top-rated credit-building app, “We’re very excited by the results from AppDiscovery. Its automated technology increases efficiency and improves results. We look forward to growing our strategy partnership with AppLovin.”

• Increased accuracy: Improvements in targeting have resulted in campaign results that closely deliver on campaign targets, enabling greater control and confidence in UA spend. 
• Improved campaign effectiveness: Run multiple campaign types to acquire users with different, but complementary, retention and ROAS curves. Not only does this identify which campaigns work best to achieve your specific targets, but it also reveals new incremental audiences to engage with.

Triwin, a fast-growing games publisher in China, has leveraged AppDiscovery’s AI advancements to increase accuracy and improve effectiveness: “We’ve evolved from relying on a single UA campaign to achieve our goals. Embracing a mix of advanced campaign types has allowed us to scale AppLovin to become our largest UA partner for our new games and has grown our new business by 3x. It also gives us the ability to reach different audiences, find the right mix of users that will match our targets, and drive incremental growth for our business.”

• More agile campaigns: Our models learn fast, so costs associated with learning phases have been significantly reduced. Immediately start running advanced campaign types, allowing you to hit targets within a few days of launch and significantly accelerate campaign ramp-up time.

FunPlus, a global games company with more than 350M+ downloads, has already benefited from the greatly reduced time it takes for campaigns to learn: “With the recent AI advancements, our newly launched campaigns have optimized in just 5 days — and that means that now we can expand our UA goals and reach them faster. This allows us to

launch more campaigns and find our audience quicker and at less cost than ever before.”

• Global expansion: Find high-value users worldwide instead of focusing on a smaller set of regional markets by running a single global campaign. Marketers can realize massive scale while hitting their target objectives, eliminating the need to manage various geo-segmented campaigns.

Goodroid, a Japanese games developer with over 100 apps, “Our team is great at producing top games, but we’ve traditionally honed in on a few key markets. AppDiscovery’s ability to run global budget campaigns that closely deliver on our targets has unlocked an enormous scale across previously hard-to-reach audiences. As a result, we managed to grow our scale by more than 3x with the majority of the growth coming outside of the U.S./Japan, which is now making up half of our buying.”

We are excited to ramp all our existing advertisers on these significant feature enhancements – so that they can achieve and beat their goals and continue to accelerate their growth. As the benefits of these advancements extend well beyond our existing partners, our teams are focused on bringing more advertisers, across all verticals of business, to the AppDiscovery solution. We believe this paves the way for materially more opportunity and growth for our partners over the coming years.

AppDiscoveries AI Enhancements, Idil Canal, General Manager, AdTech, 7 August 2023

As we celebrate the first anniversary of our enhanced AXON technology, we are excited by its potential to continue to improve our position in mobile gaming and enable our expansion into new advertising categories.

Applovin, Q2 2024, Shareholder Letter, 7 August 2024

There is something about Applovin that I struggle to understand, like the quote below.

Our platform is entirely performance-based. In other words, gaming advertisers who market on our platform generate a measurable revenue and profit from the dollars they spend on our platform. Our customers run marketing campaigns with target return goals but tend to have a much higher appetite for spend on our platform than we can deliver today. And why can’t we deliver more today? Because our current system can only find a limited number of users who will meet their revenue goals.

As our technology improves, we will continue to find more users who achieve these goals, increasing advertiser spend, resulting in materially higher growth than the growth rate of the mobile gaming market. Last quarter, I talked about a goal of growing our software business 20pc to 30pc for the long term. I typically don’t communicate externally about our goals if I don’t have confidence in it. I’m communicating it now because I do have strong confidence in it, and I see many years of growth ahead of us.

Here are the primary drivers of that growth goal. Continued improvement from our models as they learn from more data. As our models gather more data, they’ll become more accurate and find more good users for our advertisers, gains that our team delivers to the efficacy of our models through enhancements. Our research, science, and core engineering team members are exceptionally talented and consistently deliver lifts to the performance of our models.

Demand expansion into new verticals, we just launched the first web advertising campaigns for shops this quarter. And while in pilot right now, we think it will unlock a lot of demand expansion opportunities for us. And then supply expansion, as we broaden out our demand base outside of gaming, we expect the new categories will really help grow our CTV footprint. We continue to be very excited about our prospects and the performance our team is able to deliver.

We will work tirelessly to achieve the goals we set and hope that over the next many quarters and years together, you will have a better sense of how an AI-driven marketing platform creates growth opportunities that just weren’t possible in advertising before because technologies were not this sophisticated.

Adam Foroughi, CEO and co-founder, Applovin, Q2 2024, 7 August 2024

Something amazing is happening at this company but I don’t understand what. I have tried to give you enough material to realise that whatever they are doing is producing exciting results and there should be more to come.

Carvana Is A Wonderful Business

I have always loved Carvana as a business. I think the guys who run it are super smart, super ambitious and poised to conquer the US market which is big enough to satisfy all their ambitions.

The third quarter was another exceptional quarter for Carvana. We had record performance in virtually every key financial measure. Our Net Income in the third quarter was $148m, leading to a net income margin of 4.0pc. Our operating income was $337m and our adjusted EBITDA was $429m. This translates to an 11.7pc adjusted EBITDA margin. And these profitability records have to be viewed in a very important context: they were achieved while growing at 34pc year-over-year by a company that currently has just 1pc market share. The machine we have built is fundamentally differentiated and the result is an opportunity with few precedents. Most importantly, our customer experiences, our financial performance, and our pace of growth continue to separate us further from the pack in our industry. Today, we are the most profitable and fastest-growing automotive retailer and there is still much more to do. While we are extremely proud of the exceptional experiences we deliver to our customers, we know they can be even better. We see the path, and we know how to keep improving. While we are extremely proud of our financial performance, there are still significant opportunities for fundamental improvements in our unit economics. We see the path, and we know how to keep getting more efficient. And while we are already the second largest used automotive retailer in the country, we are only a small fraction of what we can ultimately become. We see the path, and we know how to keep scaling. As we have discussed in the past, we believe there are three fundamental drivers of our growth:

1. Continuously improving our customer offering. Increasing awareness, understanding, and trust of our brand. Increasing inventory selection and other benefits of scale Later in this letter, we discuss the ways we continue to integrate and benefit from our acquisition of ADESA. In our growth frame above, we believe ADESA is a clear, tangible, and easily extrapolated example of growth driver #3. We hope you find this as exciting as we do. The pieces are all in place. We are a team that knows how to build. We have an offering customers love. We have a uniquely profitable and highly scalable business model. And we have already built, acquired, and invested in the most complex and expensive parts of the infrastructure necessary to be many multiples larger than we are today. Our existing reconditioning infrastructure can support annual production capacity of over 1m retail units and Our real estate footprint can support annual production capacity of over 3m retail units. The future is bright. We remain firmly on the path to buying and selling millions of cars, to becoming the largest and most profitable automotive retailer, and to fulfilling our mission of changing the way people buy and sell cars.

Carvana, shareholders’ letter, Q3 2024, 30 October 2024

It is an exciting time for Carvana. Opportunity remains in every area of the business. Given the ambition and creativity of our team, we believe we will continue to uncover additional opportunities at least as quickly as we can execute. Accordingly, we believe that the biggest determinant of the ultimate degree of our success is execution. We are executing very well today, but our experiences and progress in recent years are a constant reminder that hardship sharpens focus and drives hunger while success often does the opposite. We will work hard to fight the relentless human tendency to drift toward comfort. It will be hard. But our teams have already proven their ambition and grit. We can do hard things and we are up to this challenge. The march continues.

Ernie Garcia, CEO and co-founder, Carvana, Letter to Shareholders, Q3 2024, 30 October 2024

As I write, it is clear that Trump has won, and he has won by what looks like a landslide, taking all the swing states. Like Reagan before him, Trump tells Americans what many want to hear: that America is the greatest nation on earth, and he will make it even greater. Democrats moan that there are loads of problems, and they are the ones to fix them; that is a much drearier message.

Watching Trump’s victory speech is a bit like watching a variety show host in action, not something you will ever get from Keir Starmer. Trump is a weird, narcissistic, schlocky sort of guy but if he was campaigning over here I would take him over Starmer any day of the week.

One of the first assets to react was Bitcoin. The assumption is that under Trump, the US government may start buying Bitcoin. It’s not yet the explosive chart breakout that will send Bitcoin into orbit but it sets the scene.

Trump Victory Puts A Rocket Under Financial Shares

Also striking was the strength of financial shares. Anything with Bank in the name exploded higher. Goldman Sachs is given as an example below. A more dynamic US economy and stock market with more IPOs, more mergers and acquisitions and higher share prices is great news for a business like Goldman Sachs.

Share Recommendations (6 November 2024)

Applovin. APP

Carvana CVNA

Bitcoin BTCUSD

Goldman Sachs GS

Strategy -Trump Is Good For US Shares

I don’t know whether Trump is a billionaire but he would love people to think so. And his attitude to other billionaires could not be more positive. He sang Musk’s praises in his victory speech, describing him as a super genius and saying the more of those there were in America the better. What is most encouraging about the USA is that a guy with those attitudes, so different from the desperate attempts at levelling down which are so central to the ethos of the UK’s Labour party, has just won a landslide victory to become president.

Some of his other attitudes are less appealing so it is just as well he is nearly 80 years old or no woman in America would be safe.

I am very sure that if asked to choose between the aggressive optimism of the budget delivered by Kwazi Kuartang under Liz Truss’s brief prime ministership and the dreary negativity of the endless moaning about black holes which characterised the budget from Rachel Reeves Trump would be 100pc lined up with Truss and Kwuarteng.

I hope that Kemi Badenoch, my MP in Saffron Walden, now leader of the Tory party, will take a more positive line and push for a realignment of the right in British politics that will see the drippy Liberal Democrats disappear like the wraiths they are and bring a breath of fresh air into British politics. I suspect that I would like a budget delivered by Nigel Farage.