AppLovin operates a mobile gaming company with hundreds of millions of daily active players and a software company, which was started in 2012. The company works as follows: The software division offers a marketplace, among other less important services, where companies can advertise on their apps, and other companies can place ads for their apps. These desired ads are then sorted by an in-house AI called “Axon,” which ensures the ads reach the appropriate viewers.
What makes this AI special is that it is fed with data from 700 million mobile gamers, which, according to the company, makes it very effective.
The software division is currently growing by about 50% annually, and in the last quarter, revenue grew by 37%.
Naturally, AppLovin has very good margins, with a gross margin of 70% and a net income margin of 20%. I also foresee growth in the net income margin through cost-cutting.
In the mobile app ad business, AppLovin is well-regarded despite large competitors like Google, and it is used by many developers, overshadowing other providers like Unity.
The CEO is also the founder and holds a significant number of shares. It's also positive for shareholders that the company is buying back shares—2.5% last year and 6.6% TTM.
However, as I mentioned, there are also negative points:
I have studied the company for a long time and found some things that I don't find ideal for an investment. Regarding ad publishers, I've seen studies showing that companies make more money when they advertise through Google's program (AdMob) than with AppLovin. I've also seen many reviews where people described how their AppLovin account, which they used to run ads on their apps, was suddenly banned without any notice or warning.
In itself, I don't believe these individual issues will impact revenue, but I fear this might just be the tip of the iceberg.
I also fear headwinds from privacy changes by Apple or even competition from Google.
For me personally, I think I’ll buy a small position at first because this way, I have less risk. However, with AppLovin's potential growth rate, the position could still develop into a significant part of my portfolio.
What do you think about this?
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