At present, APP’s growth has been based on advertising in the mobile gaming vertical. Mobile gaming was the natural starting place for APP’s advertising business segment because mobile gaming was their original business before they turned to advertising. AppLovin is still actively engaged in this business segment, however, this segment is more or less stagnant. I’m sure CEO, Adam Foroughi, would not argue with that observation as he expressed during the most recent quarterly conference call an intention to sell that business segment as soon as they can find a buyer willing to pay a fair price.
There are any number of different ways to evaluate a company, but from what I’ve seen on this board and elsewhere the fundamental concern regarding the future growth of APP stock price is based on the growth of AppLovin’s bottom line coming largely from margin expansion, which is probably now near peak combined with a medium term stabilization of revenue growth. So perhaps the best we can hope for in the medium term is a kind of stabilization in gross/EBITDA margins and ~35% - 40% in revenue growth. In my opinion, this is a faulty analysis. Let me explain why I think so.
First off, AXON 2.0, the AI engine that drives AppLovin’s advertising segment was implemented sometime during 3Q23. This represents a significant discontinuity in APP’s financial performance so the basis for analysis should ignore everything prior to 3Q23, the first quarter of business with AI at the heart of the advertising business. And that’s generous because AXON was not online for the first part of 3Q23.
APP’s EBITDA margin has grown to 46.25%. But let’s take a closer look at that margin growth. Impressive as it is, it represent growth in total EBITDA. That’s the rapidly growing Software segment (which AppLovin is renaming Advertising) as well as the stagnant Apps (mobile gaming) segment.
Let’s look at the EBITDA margins individually in each segment shall we? Here’s the most recent five quarters of the margins for the S/W (Advertising) segment:
3Q23 4Q23 1Q24 2Q24 3Q24
72.2% 72.9% 72.5% 73.2% 78.2%
Notice anything? I don’t know about you, but to me that looks like a steady trend of increasing EBITDA margins.
Here’s the most recent five quarters of the margins for the stagnant Apps segment:
3Q23 4Q23 1Q24 2Q24 3Q24
15.3% 14.9% 14.9% 21.9% 18.8%
As noted above, AppLovin management wants to sell this business segment. The day they do, their margins will take a big leap upwards.
I’d venture that the current 46.25% total EBITDA margin has a lot of headroom as it is currently being weighed down by the low performance Apps business segment.
How about future revenue growth having stabilized at 35% - 40%? Again, those numbers represent total revenue growth for AppLovin. Let’s see what it looks like if we break it out by business segment.
Here’s the most recent five quarters of YoY growth for the S/W (Advertising) segment:
3Q23 4Q23 1Q24 2Q24 3Q24
58.4% 60.5% 64.1% 65.8% 69.7%
And I won’t even bother with documenting the revenue growth for the Apps segment by quarter, but here’s the YoY range: Low in 3Q23: -11.5% and their best quarter of the last five 2Q24: 7.3%.
Notice anything? Not only is every quarter of revenue growth in the advertising segment better than the previous quarter, it has yet to include the revenue from new verticals.
Ecommerce is expected to become GA this year. The only thing that’s holding them back at present is the additional work required in order to make it fully self serve. AppLovin does not intend to invest in expanding the sales and marketing spend. At present their S&M spend has been declining from 3Q23 24.6% of revenue to 3Q24 17.2% of revenue. It’s reasonable to expect this trend to continue.
In other words, relying only on the totals for the whole business clouds the picture of where the future of this business resides. I’m not selling my shares.
