$APP narrative vs. numbers

Investment Analysis Clubs Saul’s Investing Discussions
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To me $APP seems like a gift of an investment opportunity in that it should be relatively easy to track their short, medium and long-term narratives.

  • SHORT TERM: growth in revenue, gross margins etc. plus number of installations
  • MEDIUM TERM: Whether they are able to break into adjacent revenue streams (ex: CTV)

So what number(s) do we use to track their long-term narrative (moat)?

IMO their core claims in support of their long-term narrative are:

  • They have delivered a stepwise revolution in the ability to generate actual product-sales from the relevant end-users; so much so that they have significantly increased the TAM of their ENTIRE INDUSTRY.
  • Effectivenes of AXON II is still in early stages and is rapidly improving as we speak
  • Improvements in AXON II will fuel a flywheel: improvements → more installations, more end-user-purchases → more data → Improvements to AXON II

IMO per-installation revenue is the best number we can use to track whether this flywheel exists and how effective it is.

And $APP does indeed claim that any improvement in AXON II will be immediately accretive to “revenue per install”.

From this last CC:

" Yeah. So, the numbers will be disclosed within our 10-Q, Omar, so you can see all the actual figures there, but similar to prior quarters, we’ve had an increase in both the net revenue per install as well as the volume of installations and that’s through the continued improvement of AXON that we’ve been talking about. As the technology continues to improve, we should see both the growth in the amount of money that we’re making per installation and volume of install as we see more advertisers increasing their spend. "

Also, per their 10-Q, they are NOT SAAS, and they don’t even really have a usage-based model:

" As is common in the mobile app ecosystem and in the advertising industry, our clients do not have long-term advertising commitments with us. Our success depends in part on our ability to satisfy our advertising partners."

So there you have it: IMO we it should be remarkably easy to track $APP’s short, medium and long-term narratives using simple numbers that are easy to obtain.

For the mediun term, we should soon know if/when additional revenue streams are materializing.

So let’s check the 10Qs to track some some remarkably minimal numbers relevant to short and long-term narrative: the percentage increase in per-installation revenue and the percentage increase in number of installations:

Fiscal calendar $per-inst. % # installs %
2022_Q3 2022_Nov 33 19
2022_Q4 2023_Feb 46 24
2023_Q1 2023_May 48 (14)
2023_Q2 2023_Aug 38 (08)
2023_Q3 2023_Nov 40 29
2023_Q4 2024_Feb 35 17
2024_Q1 2024_May 05 87

Personally I find that last row VERY interesting: they only had a 5% increase in “net revenue per install” which is a HUGE drop vs. prior quarters. I think the most likely explanation is they have lapped the initial deployment of AXON II. HOWEVER an important part of their narratie claim is that AXON II is rapidly improving; if that’s so then why only a 5% improvement YOY in “net revenue per install”?

Also interesting in that last row is the huge percentage increase in number of installations, which IMO was probably driven by a short-term factor of Advertisers defecting from $U. We’ll have to see in upcoming quarters but I don’t think we’ll continue to such dramatic increases in number of installations.

So in this last quarter we have BIG increase in a number behind their short-term narrative, but only a VERY SMALL increase in the (more important) number behind their long-term narrative.

So IMO even though revenue, margins etc. looked really great this quarter, there is potentially a huge problem with their long-term narrative: the boost in revenue provided by AXON II now looks like a one-time event, not a constant flywheel as their narrative claims.

Unfortunately I chickened out a bit and scaled back from “medium” position to “small”, prior to earnings.
I’ll probably be looking to add on any weakness in the short term.

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Intjudo, is it possible the revenue per install is a direct result of the jump in installations, with so many new installations coming on board?

I imagine new customers would take a while to build up their investments, so the revenue per these customers would dramatically lower the per install revenue.

It was a little worrisome to me that they didn’t massively guide upward given everything, but I’m thinking this may be an inflection quarter where they are waiting to see if the positives they think are going to play out actually will.

I’m thinking it’s worth the risk but am interested in any and all who want to push back on my theory - especially if there is evidence refuting that possibility.

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I wish they would tell investors what the net revenue per install dollar amount is, because I’m having some challenges reasoning about what this metric “net revenue per install” means. A slightly different understanding of how they measure this could have different implications. Wondering if the company defines it somewhere because I haven’t been able to find it.

From what I can tell, this number is the how much the developer using MAX gets in revenue from an install over the life time of the user’s install. I believe this number includes revenue from ads shown to users over the entire course of that user’s usage of the specific app.

If an user uninstalls the app then the LTV or net revenue per install for that user is fixed or locked in place. However, where this gets tricky to reason about is users who are on the app for a significant period of times, say multiple years and then go back and click ads. Is that then boosting the LTV for that specific user?

It’s made more confusing to me that they report these net revenue per install and total installs in year over year percentages rather than giving the raw numbers and let investors calculate themselves. This is a small minus on the investing thesis for me. My hope is that they are not trying to cover up something but it’s just that their AXON-2 is now driving more total installs than revenue per install.

I’m also wondering is net revenue per install something we would expect to keep going up year after year or should this be flattening out? I cannot imagine this is something that could grow indefinitely as there’s only so much room to squeeze ad revenue out of user per install.

Basically I have more questions than answers on this metric and it’s something to look into and follow.

It seems understanding the product more will be helpful. They have a decent intro video on the MAX system here,

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One other thing: as @brittlerock said previously, “There appears to be very little switching cost.” Very true; indeed, $APP was able to easily take advantage of $U’s “unforced errors” by quickly whipping up a capability to migrate $U developers to the $APP platform with very little friction. Presumably a competitor could do the same if/when they have a better mousetrap.

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@mizzmonika

“is it possible the revenue per install is a direct result of the jump in installations, with so many new installations coming on board?”

I really don’t know. You could be right! However I can’t think of a way to know more until we get their next quarterly report.

All this really great conversation about $APP (…especially their debt) has me more on the fence than I was before.

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There is a way. Call Investor Relations. Let them know you are representing Saul’s board at the Motley Fool and you will post the response. They will answer your questions if they understand their job.

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MFChips: I already did ask IR (by email) but does this board have so much clout that it would affect whether they responded? That would be good to know for all of us who ask IR questions (and sometimes don’t get responses).

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To answer your last question, I admittedly don’t do this often, but when I wrote IR at Aehr and asked my questions, I said I was part of a group of investors on a Motley Fool board (didn’t identify) and that the question I was raising was part of a thread that had x thousands of views (don’t remember how many–it was a lot at the time).

That got their attention and I got a quick response, inviting me to call, which I did. He took a lot of time to answer my questions–but also asked that I not publicly post specifics in the email response he had sent previously or relay some of the information he let slip on the call. I adhered to that.

So…yes, some information about the reach of those discussing whatever topic you’re raising gets a response, but if you intend to post the reply verbatim, it’s also good to give a heads up that such is your intention.

JabbokRiver

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@mizzmonika My perception is that Applovin is one of the most candid and transparent companies I’ve followed. They have very comprehensive financial reporting, but you just need to know where to look.

With regard to your question about revenue per install, the question was asked and addressed during the 1Q24 conference call:

Omar Dessouky

Do you have time for one – just one quick one. I didn’t see net revenue for install growth – or install growth on your letter. Could you update us on that and give us any kind of the puts and takes around that?

Matt Stumpf

Yeah. So, the numbers will be disclosed within our 10-Q, Omar, so you can see all the actual figures there, but similar to prior quarters, we’ve had an increase in both the net revenue per install as well as the volume of installations and that’s through the continued improvement of AXON that we’ve been talking about. As the technology continues to improve, we should see both the growth in the amount of money that we’re making per installation and volume of install as we see more advertisers increasing their spend.

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@brittlerock I did read that when I read the earnings call but could not make sense of it. They don’t report those numbers so you can’t see them. They only report the %increase in each which makes things quite muddy imo.

If their engine is exploding with brilliant ad targeting (and don’t get me wrong - I am a believer and a shareholder) then shouldn’t their average revenue per install be going up by more than 5%, as intjudo points out? Well, if we understood revenue over the lifetime of an install and that all these new installs haven’t started to monetize yet, that would explain it right?

But Matt Stumpf didn’t say to look out for that and I am slightly suspicious as to why he didn’t just give the numbers in the earnings call - was he afraid to answer the obvious question we now have?

This is a yellow but not a red flag for me but it is a flag. Maybe I’ll try to email IR again and say I’m on this board and see if that gets a response.

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I lost quite a bit with APP, following Bert’s recommendation a while back. I have a really hard time going back into previous losers. I know I shouldn’t be like that, but there is only so much pragmatism I can follow. :melting_face:

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Bert just wrote a comment in his latest update lamenting his purchase in APP before but recognizing that the past is not the present and he may opportunistically purchase shares at this point. He also reminded subscribers he had recommended the shares recently and it’s too bad he didn’t “eat his own cooking.”

I wanted to understand why Bert soured on APP and what went wrong so I went back and read ALL his postings on APP. Anyone considering APP - or rejecting APP for the above comment - who subscribes to Bert should do the same.

What that did was STRENGTHEN my belief in APP. Brittlerock commented that they have been a highly transparent company and there it was, all in Bert’s commentary, about how they are not really interested in the APP side, they are moving to the Software side, they will eventually go into CTV, yada yada yada. It’s all there.

So what happened to the stock? Here’s what happened: They IPO’d in April 2021. Bert’s first recommendation was in October 2021. Just to remind those who might have lived in a cave during that time, that was one month from the peak of what was going to be the worst downdraft many of us ever experienced.

Through that, APP continued to grow but high-growth shares took it on the head. At some point, Bert became enamored with IronSource, a competitor, who he thought might eat some of APP’s lunch, and sold off APPLovin to buy Snowflake. He did not point to anything APP did wrong but it seemed to me more of a hunch toward Ironsource than away from APP. This was on June 30, 2022 - we were still six months away from the end of the bloodbath and I am sure at that point, both Bert and rodatl lost a bunch, as we all did on our high growth stocks.

Well, Ironsource was purchased by Unity…and we know what happened to Unity. Unity openly admits that their ad engine is not as good as APP’s (but they’ll get there, they say), and there is now all this bad blood they created with their user base. I think their engine will have to be a helluva lot better for people to come back when they feel that way. And watching APP’s focused attention and rise through their earnings and Bert’s commentary, my money is squarely on APP.

So people who lost money on APP - you lost money on all our board stocks too. APP did nothing wrong. You just got burned by timing. If I thought like that, I would be off this board.

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@mizzmonika the Stumpf quote specifically stated “will be.” Pretty strong indication that the numbers are to be reported in the next 10Q. At least, that’s the way I interpreted it. I guess we’ll know exactly what gets reported when the next 10Q is published.

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I interpreted that differently. I assumed because he didn’t say that in the conference call, he meant this current 10-Q. I guess time will tell. After reading everything I remain positive, albeit with some murkiness.

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I was with you until “APP continued to grow.” Their revenue didn’t grow in 2022. This might not be because their product(s) were bad…maybe it was just malaise with the space. But it’s important.

Predictability (which APP seems to lack) is a big part of the method we try to follow here. Growth is the #1 thing. Not just “how fast are they growing?” But “why are they growing” and “how sustainable is that growth?”

Bear

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You are correct. I was not looking far enough back when I spoke.

APP grew revenues until 3/22 when they had a 21% dip. In that same quarter, META dipped 17%, GOOG dipped about 8%, and TTD dipped 22%. So APP and TTD had the biggest dips but they all had quite the dips.

In fact, though the patterns were not exactly the same month for month, META, GOOG, UNITY, TTD AND APP all dipped the same time (UNITY one quarter later), then struggled for several earnings reports before they began to rise again. TTD recovered more quickly but was choppy in its own way later down the line.

So I’m not sure it’s fair to call APP out for unpredictability given the entire space was going through the same thing. Unless you want to just call out the advertising space for unpredictability.

In any case, for the past four earnings quarters APP has had stellar results and have been completely predictable and I’ll leave it up to individual whether to ding them for a time when the entire industry was suffering.

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@PaulWBryant, Bear is your nickname, maybe it had something to do with football at one time, but now it seems to well identify your analytical approach with respect to investments. That’s not a criticism, it’s important to look for and consider the bear case. Frankly, you’re much better at it than I am. I tend to see the bull case more clearly than the bear case. In any case, in answer to your questions in the quote above, I’ll reference the statement describing Applovin’s business model from page 3 of the 1Q21 shareholder letter:

"At our core, we’re a marketing software company that helps mobile app developers attract new users
and grow their businesses. In the last year, the AppLovin software platform helped app developers find
over three billion new customers. Central to what makes our software powerful is our machine-learning
engine, AXON, which processes over 6.5 trillion events per day and over 3 trillion machine-learning
predictions per day, and continuously improves with more data. In early 2018 we started our own
content business that now generates substantial first-party data. Paired with AXON, the combination is a
meaningfully differentiated engine for our software. We’ve always made money charging marketing
software fees when clients pay us to advertise. Today, we also make money when our content grows and
consumers pay us or advertisers buy ad space in our games. On top of that, our financial scale and
vertically integrated cost structure allows us to more effectively acquire new users.

Our integrated model is working well. As our content grows, so does our data advantage. In turn, our
software improves, and we can drive more users to our content. All revenue streams grow. (As you may
recall, this is our strategic flywheel as discussed during our IPO.) Integrating our software, content, and
data gives us strong competitive advantages in our enormous $180+ billion TAM, and gives us plenty of
room to grow."

That’s the overview. The narrative continues for several more pages providing considerable descriptive depth explaining the competitive advantage they believe they hold and how their product strategy drives growth.

As I stated above, I find this company to be extremely candid and transparent. I’ve got quite a way to go before I consume all the documentation they provide, in fact, I probably won’t read all of it, but my sense that they do not try to obfuscate is only reinforced as I read more of the readily available material. It seems to me that if they withhold anything it is only because revealing it might tend to erode their competitive position.

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MK,. Bert’s service is a paid service. If he did not post this in a public forum, it is improper to do so here. Please forgive me of I am wrong and it is known publicly.

Gordon

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Hi Gordon, I thought about that and deeply respect not sharing Bert’s buys and sells - especially in the moment. He usually will post something publicly shortly thereafter.

Regarding APP, he did not buy, he just said he may buy. This has not always translated into buys so I felt that it was ok to share that. Also, he had already posted a public comment on seeking Alpha re: his change of heart.

https://seekingalpha.com/article/4676549-applovin-can-once-jilted-investors-now-find-happiness-with-a-recently-inflected-business

I agree it was borderline but made the call based on all this data. However, if the board feels that this is off limits I will refrain in the future.

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The Trade Desk revenue grew 32% in 2022. Just sayin.

Bear

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