Well congratulations to all of the APP longs (does not include me unfortunately!) Wow!
I’m a lot more familiar with TTD than APP, but I just poked around a bit and can share my two cents.
My Applovin History
Although I did write up one of the first APP intro posts here a few years ago (after Bert had recommended them at the time and I was intrigued by the prospects), I took a small position back then which quickly shot up about (+20%?) within a few weeks and I sold out and took the quick profits.
I believe the stock proceeded to drop -80% (maybe -90%) over the next year or so and I chalked it up to a lucky swing trade that I was fortunate to get out of when I did.
I also had dabbled in other advertising tech stocks (Magnite and Pubmatic) which were very volatile and ultimately not profitable for me, which helped to re-set my thinking that, if I have a big position in one company (TTD) in that industry, that has a long history of success, with a management team that I greatly trust, and lots of indications that they will continue to have a long runway and be a/the leader in their field (and I have a very low cost basis at about $11/share, one-tenth of where it trades today), why am I messing around with other alternatives until those things start to change or deteriorate.
That’s not to say that, today, APP couldn’t be the better investment going forward. It could. I just don’t follow it or have as good a familiarity with the company, or why their prospects for the next year, or multiple years should continue to be strong. Obviously they are doing amazing recently.
Initial Overviews
Revenue Recognition
As a reminder, both TTD and APP are largely “net revenue” companies (considered an “agent” from GAAP accounting standpoint). This means that what they show in revenue on their income statement is only the percentage/commission (“take-rate”) that they collect and keep.
For Trade Desk, the amounts they charge their customers and collect in cash is more than five times larger than what they show as revenue (e.g. revenue is less than 20% of the cash they charge and collect)
So instead of showing:
$100 gross revenue
$81 cost of sales
=$19 gross margin
(Note that the $81 cost of sales is essential the money owed to the platform (e.g. streaming service like Hulu) which TTD collects and immediately passes on to the platoform)
they essentially show
$19 revenue
$0 cost of sales
$19 margin
In the past, some users on the TMF boards have argued that you should consider the “platform operations” expense on their statement of operations/income stmt as cost of sales and look at the net of those two as their gross margin.
I’ve generally disagreed with that as I believe that most of what is included in platform operations are expenses that most companies (even ones that show their revenue “gross” on the P&L before subtracting cost of sales) would include in G&A expense further below gross margin.
So when I compare TTD to a tech company that is considered an accountig “principal” (not “agent”) and records their revenue gross, I compare TTD’s total revenue number to the gross margin of the other company.
Here is how TTD defines platform operations expense:
“Platform operations expense consists of expenses related to hosting our platform, which includes “internet traffic” associated with the viewing of available impressions or queries per second (“QPS”), purchasing data used to inform and improve the platform and providing support to our clients. Platform operations expense includes hosting costs, personnel costs, data-related costs and amortization of acquired technology and capitalized software costs for the development of our platform. Personnel costs include salaries, bonuses, stock-based compensation and employee benefit costs for personnel who support our platform and provide our clients with platform support. We capitalize certain costs associated with the development of our platform, which are amortized in platform operations over their estimated useful lives. We expect platform operations expenses to increase in absolute dollars in future periods as we continue to experience increased volumes of QPS through our platform and hire additional personnel to support our clients.”
I see that, although APP does specify they also record revenue “net”, they do also have a line called “Cost of Revenue”, which they define as:
“Cost of revenue consists primarily of third-party payment processing fees for distribution partners, amortization of acquired technology-related intangible assets, amortization of finance lease right-of-use assets related to certain servers and networking equipment and costs for third-party cloud service providers. Third-party payment processing fees relate to IAP Revenue. The fees for IAPs are processed and collected by third-party distribution partners. We expect our cost of revenue to increase in absolute dollars over the long term as our business and revenue continue to grow. We also expect our cost of revenue as a percentage of revenue to fluctuate period-over-period.”
So some of the same things are included in TTD’s “platform operations” exp that are in APP’s “cost of revenue”, such as amortization of some technology etc. In my opinion, I would probably argue that what is in APP’s cost of revenue could more easily be categorized as G&A expense, rather than arguing that TTD’s platform exp shoudl be COS.
Sometimes accounting isn’t so cut and dry and is open to interpretations, even by experts that deal with it every day for their career.
Also, it’s possible that the “cost of revenue” for APP relates to their “Apps” segment and not the “Software” (Advertising) segement, or some allocation between the two, so it may be a moot point if you are focusing on the advertising comparison between TTD and APP. It’s probaby explained somewhere in APP’s filings, but I haven’t dug in deep enough to know for sure.
For the below, I’ll compare what APP shows as their software revenue (without netting any of the cost of revenue out) to what TTD shows as their total revenue, as that is my best guess as to what would be considered an apples to apples comparison of the advertising businesses of the two. Go ahead and adjust however you might feel appropriate.
Also note that “Accounts Receivable” for companies that show their revenue “net” is usually going to look (misleadingly) high because AR has to include the full gross amount of cash that customers owe to the company (e.g. the $100 in the TTD example above, not just the $19).
So some people will look at a “net” revenue company’s balance sheet and mistakenly believe that they have big collections problems getting money from customer and risk of writeoffs of bad debt in the future becasue the AR compared to revenue looks wildly higher than other companies they typically analyze.
In fact, I believe TTD typically gets paid in advance for their ad placements (before the ad has run), so they actually have more of a “float” (in insurance terms) where they receive the money from customers before they need to pay out the platform’s share. This is a very good thing.
In APP’s filing, I see it says that customers generally have to pay them within 30 days of the end of the month. If I’m reading this correctly, then APP has more of a credit risk than TTD, if APP’s customers don’t pay them until after the ad is run/shown/displayed, and could potentially never get collected.
Revenue (advertising)
Just looking at the last year or so, I see revenue growth rates of:
APP (software/advertising)
Sequential
Q4’23 +14%
Q1’24 +18%
Q2’24 +5%
Q3’24 +17%
TTD
Sequential
Q4’23 +23%
Q1’24 -19%
Q2’24 +19%
Q3’24 +6% (guidance, likely to beat)
The one thing that stands out here to me is it does not appear that APP’s platform revenue has the seasonality that TTD (and most every other advertising company in the world) has, where Q4 is much higher due to the holiday shopping season advertising spike.
I’d be curious as to why it doesn’t seem to have impacted APP, at least last year (the only year I was looking at). It’s possible that the gaming customers that they are targeting are not so keen on picking up a holiday gift while playing a mobile game, and they are more likely to buy other types of products, so maybe it’s very different in that way? I really don’t know.
Here’s the same four quarters showing the year-over-year comparison:
APP (software/advertising)
YOY
Q4’23 +88%
Q1’24 +90%
Q2’24 +75%
Q3’24 +66%
TTD
YOY
Q4’23 +23%
Q1’24 +26%
Q2’24 +28%
Q3’24 +25% (guidance, likely to beat)
Clearly much higher growth rates for APP. If it’s mostly organic, then my questions would be how sustainable is the higher rate of growth going to be, especially over the next 1-3 years. Will it be like many other companies we’ve followed over the years where a very high rate of growth suddenly dips. I dont’ think anyone expects 70% is sustainable for long, but the question will be whether it drops to 50% next year, or 30%, or what? I don’t have any insight
I also don’t know if APP has had acquisitions that are boosting these numbers at all with inorganic revenue growth. I can see from their goodwill and intangibles on the balance sheet, that APP looks to have done some signfiicant acquisitions in the past (more on that in the balance sheet section below) but I don’t know if those were recent or could potentially be from a few years ago, such that the current revenue growth is apples to apples and not impacted.
But I do know for TTD, that their new deals with Disney+, Netflix, HBO Max, etc are only suppossed to start to add new revenue in 2025 and probably 2026, as well as what should bea continued overall shift from linear to programatic digital advertising. Whether that leads to future growth above, below, or in line with the mid twenty percents that we’ve seen recently is hard to say, but at least I have some reason to expect positive momentum in the coming year(s), all else being equal.
Market Cap
With today’s big pop in APP stock price, based on what Yahoo! Finance is currently showing, they have a market cap of about $80 Billion. TTD’s market cap is about $63 Billion, or about 78% of APP’s value
If I add +5% beat to TTD’s Q3 revenue guidance (purely a placeholder guess), TTD will do about $650 million of revenue in Q3, compared to $835 million of APP platform/advertising revenue. Almost exactly 78% as much, interestingly
Obviously APP is growing at a much higher clip right now, so if everything else was equal, you would expect these to be more disconnected than they currently seem to be.
Income Tax expense
TTD has been consistently profitable for years, so they typically incur a pretty “normal” amount of income tax expense. In Q2 it was about 24% of their pretax income
Looking at APP’s Q2 (from three months ago for more of an apples to apples comp), they had almost no income tax expense. Only 4% effective tax rate on their pretax income
I assumed initially that APP may have had more unprofitable loss years recently have some “net operating losses” ("NOL"s, essentially tax loss carryforwards in corproate tax speak) which they can use to reduce their new tax liabilities.
That may be partially true. In APP’s last 10-K annual filing, it says they had a $47 million dollar NOL at Dec 2022 and only $8 million at Dec 2023. So they’ve probably had the benefit from their NOL’s in recent quarters, but they’ve just about used them all up, and shouldn’t have much of these past loss credits to apply against new income taxes going forward, assuming they continue to be profitable.
They could be other things affecting APP’s income taxes. I’m no tax expert, but if I were modeling APP next few quarters/years, I would probably estimate a more normal level of income taxes going forward, than they’ve had recently.
Balance Sheet
Here we have some areas that seem to favor Trade Desk over Applovin
(using mostly Q2 vs Q2 comparisons since TTD’s Q3 is not released yet as of this writing 11/7/24 am)
Cash/ST Investments
Trade Desk has about three times as much cash and short term investments on their balance sheet (as of Q2 for both companies), $1.5 billion for TTD compared to less than $500m for APP.
Debt & Interest
APP has $3.5 billion of Debt compared to none for TTD
This debt is probably responsible for the $75 million of interest expense that APP incurred in Q2. On the other hand, TTD actually had interest income of +$17 million in Q2, so that’s nearly a $100 million per quarter difference in favor of TTD if those numbers are representative of where they might continue to trend going forward.
Goodwill & Intangible Assets
And I can see that $2.9 Billion of the assets on APP’s balance sheet are Goodwill and Intangible assets, I assume from past aquisitions. Trade Desk has grown almost entirely organically for a long time and don’t have these types of intangible assets/goodwill.
The risk here is if APP has a downturn where the carrying value of those assets cannot be supported, they might have impairment expense writeoffs in the future. It probably won’t affect their cash and operations, but ignoring any impact on their debt agreements, requirements to repay debt, or interest rates, a goodwill impairment writeoff shouldn’t impact their operations directly.
This does kind of go hand in hand with APP’s lower cash/investments on hand and (slightly?) higher customer credit risks), where any negative economic macro difficulties that impact advertisers, could more harshly affect APP than TTD.
Wrap Up
So that’s it. I’ll also note that I think extremely highly of TTD CEO Jeff Green (who is VERY incentivized with his employment incentive agreements to help get TTD’s stock price to $200 or $300 or more). I don’t know much about APP’s CEO. He could be great too, but I don’t know.
So there is nothing I see that makes me think I should be moving money into APP immediately. I have sold off more than 25% of my TTD shares over the past couple of months as the stock price ran up from $100 to $130 and is already more than 30% of my portfolio, as it was becoming too heavily weighted for me. But I still own a lot of Trade Desk shares and will consider whether I should make any further changes once we get their Q3 results and Q4 guidance later today, along with the earnings call.
I do expect a very good results from the Q3 TTD quarter and hopefully strong guidance for Q4. If they do, it will be interesting to see how much of that is already priced into the shares, given the strong run in recent months.
-mekong