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Is this unique software company a buy?

Updated: Jan 26, 2022

It's time to explore a not-so-popular software name. Here is the deep dive on $APP, otherwise known as AppLovin Corporation.

Current Price: $78.50

52/Wk High: $116.09

52/Wk Low: $49.41

Market Cap: $29.5 Billion

3 Month Performance: -13.97%

Read below for the deep dive!

AppLovin ($APP) is a major mobile app-focused company providing clients with a mobile marketing software platform specialized in growing the mobile app ecosystem through app discovery, content recommendation, and more.

Digging into the company’s flywheel, AppLovin’s foundation is built upon First Party Content, their Recommendation Engine, and a Social Distribution system.

Breaking down the flywheel it is key to first focus on AppLovin’s recommendation engine, which is made up of both AXON and App Graph.

Breaking down the two, AXON is the company’s machine-learning recommendation engine that was launched in late 2020. Axon uses data provided by App Graph to match users to relevant ad content improving customer results as it learns and determines the most efficient pathways to high-level return on marketing targets.

Meanwhile, App Graph collects and curates interaction data throughout all apps that work with the company, including those within their own app network.

Next, is AppLovin’s scaled distribution system which is made up of AppDiscovery, MAX, and Adjust. Breaking each down by priority, AppDiscovery curates provided ad content and then matches both publisher supply and advertiser demand.

Meanwhile, MAX, a bidding software, operates competitive auctions in real-time for ad slots within apps. According to the company, MAX is one of the first real-time auction platforms that enables all key market participants to place a bid for mobile ad impressions.

Leadership also expects, that as MAX scales throughout the future, it will build “significant” recurring revenue.

Within MAX, is AppLovin’s Compass, the company’s analytics software tool in which provides developers with testing capabilities and valuable insights that provide developers with an edge to remain competitive.

Alongside MAX is AppLovin’s most recent acquisition MoPub, in which the company acquired from Twitter for $1.05 billion in cash on January third.

MoPub, a leading mobile apps monetization-focused platform will be combined with MAX, to yield increased pricing transparency, improve efficiency, accelerate ROI for advertisers, expand revenue for publishers working with AppLovin, and will bolster outperformance amongst competitors.

For context, MoPub was founded in 2010 and as of most recent reporting generated $188 million in 2020 revenue all the while maintaining a vast supply of over 45,000 apps that provides a reach of more than 1.5 million addressable users according to AppLovin commentary.

Leadership was upbeat about the acquisition and the addition of MoPub to the company’s flywheel.

“Developers benefit from more features to help drive higher monetization opportunities and streamline workflows, leading to increased revenue for their businesses. We believe the power of this unified platform will be unparalleled in today’s market,” AppLovin CEO Adam Foroughi said.

Given the combination of both MAX and MoPub, management believes the “unified platform” will be processing over $15 billion in annualized ad spending by 2023.

To read more on the acquisition of MoPub, follow the link below.'s_Acquisition_of-_MoPub-Investor-Slides_100621-final.pdf

Rounding out the social distribution segment of AppLovin’s flywheel is Adjust, which the company acquired in April of 2021.

Adjust when acquired, was one of the leading analytics and mobile attribution companies within the industry which has now been integrated into AppLovin’s unique flywheel.

Within the flywheel, Adjust provides analytics tools that assist marketers in identifying proper audiences, automating marketing, and putting customer journeys into context.

As of the third quarter, Adjust has pleased AppLovin leadership and the company has now started to sell into Adjust’s roughly 3,000 clients, which per a company report includes multiple large-scale digital marketers.

Prior to shifting out of commentary on MAX, it must be noted that as of Q3 AppLovin reported having nearly 30,000 apps using MAX, representing a more than $3 billion annual run-rate earnings level for MAX.

Finally, it is necessary to cover the final segment of AppLovin’s flywheel, their own first-party content or apps. As of the latest reported quarter, Q3, AppLovin reported 2.9 million monthly active users (MAPs) across their own app network and once again was named the number one publisher of mobile gaming apps by downloads per Sensor Tower.

Furthermore, AppLovin can utilize its in-house analytics and monetization software throughout its application network in order to drive further growth of its first-party content.

Moving into market opportunity, AppLovin’s total addressable market (TAM) continues to expand alongside application growth within digital ecosystems. When last estimated by the company, AppLovin calculated a total addressable market of $189 billion in 2020.

AppLovin calculated their TAM by aggregating in-app advertising revenue and direct game spending while excluding in-app search advertising on a global basis. Do note, AppLovin estimated their TAM to maintain over six billion users and five million mobile apps as of 2020.

Quickly building on AppLovin’s previous TAM estimation, global application downloads expanded by nearly 12 billion in 2021, and broadly speaking the global mobile application market is expected to maintain an 11.5% compound annual growth rate (CAGR) through to 2027.

Do note, throughout the latest quarterly report AppLovin reported that the company has increased investment in its own application network, to further develop multiple blockbuster titles that will contribute to a stronger pipeline.

Shifting into management, AppLovin is led by CEO and co-founder Adam Foroughi who has led the company since 2011. Prior to AppLovin, Foroughi founded Social Hour Inc. and Lifestreet Media, both of which are advertising technology companies.

Most recently, Foroughi was named Chairperson of the board of directors in March of 2021.

Behind Foroghi is a solid management team, boasting prior experience from the likes of PlayFirst, Lyft, Cypress Semiconductor, Bank Of America, and Social Hour.

Prior to the financials, it is important to define the revenue categories in which AppLovin reports, which consists of two core segments; Consumer Revenue and Business Revenue.

Breaking each segment down, Consumer Revenue consists of revenue generated via AppLovin’s apps through in-app purchases (IAPs), while Business Revenue consists of revenues generated via advertiser spend on apps and software.

Furthermore, the Business Revenue segment can be further broken down into two categories, Software Revenues, and Apps Revenue.

Exploring the two, Software Revenue consists of revenue generated via advertisers using AppLovin’s core software technologies, while Apps Revenue consists of revenue generated via

advertising clients that purchase ad inventory across AppLovin’s own application network.

Digging into the numbers, AppLovin missed Q3 2021 expectations with an EPS of $0.00, below the analyst's consensus estimate of $0.10. On a quarter-over-quarter basis, EPS declined from the Q2 2021 level of $0.04.

Rotating into revenue, AppLovin reported $727 million in total revenue throughout the third quarter, representing 90% growth year-over-year and 58% organic growth year-over-year.

Analyzing total revenue throughout the past three quarters, AppLovin has delivered, reporting $669 million in total revenue throughout Q2 and $604 million in total revenue throughout Q1, representing 123% and 132% growth year-over-year respectively.

Amongst the prior three quarters, organic growth has also held steady, with Q1 organic growth landing at 89% year-over-year and Q2 organic growth landing at 97% year-over-year.

Further breaking down third-quarter revenues, AppLovin reported business software revenue of $193 million, representing 385% growth year-over-year and 33% growth quarter-over-quarter.

The rapid growth throughout the third quarter in business software revenue represents the fourth consecutive quarter of accelerating year-over-year growth and the second straight quarter of triple-digit growth across the segment.

For reference, Q1 business software revenue totaled $88 million, and Q2 business software revenue totaled $146 million, representing 90% and 256% growth year-over-year respectively.

On the flip side, apps revenue totaled $534 million in Q3, representing 56% growth year-over-year. Do note, consumer apps revenue totaled $377 million and business apps revenue totaled $156 million, representing 80% and 18% growth year-over-year.

Inspecting income, AppLovin reported $0.1 million in net income throughout the third quarter, representing an improvement over the Q3 2020 net loss of $90 million. Furthermore, it is important to note that quarter-over-quarter net income declined from $14 million in Q2.

Alongside net income, net income margin landed at 0.0% in the third quarter, representing a decline when compared to the Q2 level of 2%. On the flip side, do note that on a year-over-year basis net income margin improved from -23.6%.

Rounding out income metrics, income from operations landed at $45.048 million in Q3, representing a significant improvement when compared to the same time 2020 loss from operations of -$75.458 million.

For reference, income from operations has been steadily improving throughout the first three quarters of the year, totaling $11.465 million in the first quarter and $34.978 million in the second quarter.

Expanding into cash flows, AppLovin reported $276.836 million in net cash provided by operating activities, representing a continual improvement when compared to the Q1 and Q2 levels of $61.819 million and $152.276 million.

Shifting into EBITDA, adjusted EBITDA landed at $191 million in the third quarter, representing a 126% improvement on a year-over-year basis. Furthermore, reviewing the previous two-quarters of adjusted EBITDA, the metric has been continually improving, from $131 million in Q1 and $184 million in Q2.

Prior to moving on, it is important to analyze the adjusted EBITDA margin, which was 26.20% in the third quarter. When compared to the Q2 level of 27%, and the Q1 level of 21.70%, it is plausible to conclude that EBITDA margin has been steady but declined slightly quarter-over-quarter.

For basic informational purposes, EBITDA represents earnings before interest, taxes, depreciation, and amortization, representing a basic measurement of financial performance. Meanwhile, EBITDA margin is representative of profit as a percentage of revenue.

Rotating into AppLovins client metrics we must first touch on software platform enterprise clients (SPECs), which as defined by AppLovin are third-party business clients from whom the company has collected greater than $31,250 of revenue within the three months to the given quarter's date.

In simplistic terms, a SPEC is a third-party business client in which contributes revenue at an annual run rate of more than $125,000.

Breaking down SPECs, AppLovin reported having 449 SPECs as of the third quarter close, representing 305% growth year-over-year and 23% growth quarter-over-quarter. Do note, excluding the attribution of Adjust, SPECs expanded by 152% year-over-year to 280 throughout the third quarter.

While on the topic of SPEC count, it's important to note AppLovin’s impressive growth, having just 111 SPECs in Q3 of 2020 and 366 SPECs in Q2 of 2021.

Rotating in revenue per SPEC, average quarterly software revenue per spec has been trending to the upside throughout the first three quarters of 2021, landing at $398,000 in Q3, representing 10% growth year-over-year.

Although, given the acquisition of Adjust in April of last year, it is important to analyze organic growth within the metric, which landed at 63% year-over-year, bringing total revenue per SPEC to a stronger $587,000.

In parallel with SPEC performance is AppLovin’s net dollar retention (NDR), which is representative of annual recurring revenue growth amongst clients. Luckily, AppLovin has been on a tear, reporting a 255% NDR throughout the third quarter.

Although, do note that while NDR was solid in the third quarter, it unfortunately slightly declined from 279% in the second quarter of the year.

Shifting into enterprise clients, AppLovin defines enterprise clients as customers that have contributed over $125,000 in revenue on a trailing 12-month basis and it is also important to take note that enterprise clients make up a majority of AppLovin’s business revenue.

As of the third quarter, AppLovin reported having 325 enterprise clients, representing a significant increase from the Q3 2020 count of 156. On a percentage basis, enterprise client count increased by roughly 108% year-over-year.

Furthermore, revenue per enterprise client (RPEC), which is a measure of average revenue generated by enterprise clients within a 12-month period slightly declined. As of the third quarter, RPEC totaled $3.435 million, representing a decline from the same time 2020 level of $3.931 million.

It is also important to note that throughout the first three-quarters of 2021 RPEC has been trending down, totaling $4.129 million in Q1 and $3.871 million in Q2.

Moving into total software transaction value (TSTV), AppLovin uses TSTV to reflect the total value throughout their software platform including that of their first-party studios.

Analyzing TSTV, the trend has been overwhelmingly upward, with Q3 TSTV totaling $276 million, representing 343% growth year-over-year.

For reference, in Q1 and Q2 of 2021, TSTV totaled $148 million and $219 million, representing 155% and 361% growth year-over-year respectively.

Rounding out the quarter, it is important to touch on monthly active players (MAPs) and average revenue per monthly active player (ARPMAP). Throughout the third quarter, AppLovin achieved 2.9 million MAPs, representing 90% growth year-over-year.

Now, while year-over-year growth is solid, it's important to inspect the previous two quarters, where MAPs totaled 3 million in Q1 and 2.7 million in Q2, representative of sizable fluctuation within MAPs quarter to quarter.

Finally, average revenue per monthly active player (ARPMAP) landed at $44 in Q3, representative of a year-over-year decline from the same time 2020 level of $46. Although, it is important to note that ARPMAP has remained steady throughout 2021, totaling $38 in Q1 and $44 in Q2.

Leadership was upbeat on the company’s third-quarter performance.

“We are proud to report another record quarter and strong performance across all our businesses that really highlight the impressive scale and accelerating growth of our ML-based software platform,” Foroughi said.

Moving away from earnings and into the balance sheet, the numbers are solid.

Total Debt: $1.767 Billion

Total Liabilities: $2.519 Billion

Total Assets: $4.568 Billion

Cash & Short Term Inv: $1.050 Billion

Analyzing the balance sheet going back to Q1, cash and cash equivalents have been steadily increasing alongside total asset levels.

Parallel to that, liabilities have been steadily rising, meanwhile total debt has been reasonably decreasing from the Q1 2021 level of $2.174 billion.

On a valuation basis, AppLovin is trading at a premium.

Forward Price to Earnings: 96.94x

Price to Sales: 11.43x

Price to Book: 14.21x

Price to Free Cash Flow: 88.18x

While valuation on an individual basis is elevated, it is worth taking note of the average competitor price to sales metric of 24.13x, which in comparison is slightly above AppLovin’s current level.

For reference, the valuation average above was a simple average of price to sales levels from competitors $U, $IRNT, and $ZNGA and is to only be taken with a grain of salt.

Shifting into ownership, the big money is less involved with 17.55% of AppLovin ($APP) being owned by institutions. Top holders include Angel Pride Holdings, Hontai App Fund, and Nimble Ventures.

On a technical basis, AppLovin ($APP) has taken a haircut in recent months, falling off of the $116.09 52/wk high and declining just over 16% year to date.

According to the six-month charts, AppLovin continues to move with downside momentum within a MACD range of -2.423 down to –3.3146, all the while the charts are indicating an RSI of 36.2 and CCI of -105.21, both of which are on the lower end.

On the analyst front, the current high price target for AppLovin is $128.00/share, representing 62.00% upside, while the low price target is $82.00/share representing 3.78% upside.

Amongst analysts, the mean price target currently sits at $114.92/share, representing 45.45% upside from AppLovin’s current share price.

Analyzing overall risks to the performance of AppLovin as a company and its stock, a majority of its revenue continues to be generated via its application network, and further diversification of revenue would significantly decrease the risk of hiccups to overall revenue expansion.

Another risk of note that ties in with the previous risk is maintaining a strong pipeline of applications and games. While AppLovin has a track record of continually maintaining its pipeline, the possibility of blockbuster games missing the mark is a risk to take note of.

Investigating investor sentiment, AppLovin is a lesser-known name amongst growth investors broadly speaking, and its business is often misunderstood.

The bulls continue to refer to the company’s rapid growth so far, its leading software, and proven management team as reasons for upside, meanwhile, a lack of revenue diversification and significant competitors continue to be points referenced by the bears.

In short, AppLovin ($APP) is a solid company, maintaining a healthy balance sheet, expanding revenues, a growing customer base, and insofar proven management team, making it a name to possibly research further for the long term.


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