Introduction:
There is a company that went public in 2021. Its stock price performed well in the first half of the year, but it continued to suffer heavy losses for more than a year, with a drop of more than 90%. Later, it turned the tables, with the stock price soaring more than 3300% from its lowest point in two years. In just 2024, it rose more than 7 times, and its market value easily exceeded 100 billion.
This company is AppLovin, specializing in advertising and marketing, and is currently a highly sought-after AI star stock. How did it play PlayerUnknown's Battlegrounds in adversity? And how did it quickly grow into an important player in the advertising and marketing market beyond the two giants of Google and Meta? What inspiration does its business evolution have for current internet companies? What surprises will AppLovin bring with the help of AI?
In this article, the RockFlow investment research team will conduct an in-depth analysis of AppLovin's business evolution process, latest business overview, and future possibilities, giving you a glimpse into the value of this emerging advertising giant.
1. How does AppLovin create a "ad platform + application" dual-wheel drive model?
Advertising is an ideal industry with a high ceiling and high profits. The reason why AppLovin has developed so rapidly is that it has long since moved away from its early positioning as a mobile game ad platform and become a pivotal digital advertising giant. Through business expansion and partial acquisitions, it has established a comprehensive enough technology platform to support a highly expansive business, and has exceeded market expectations multiple times with its strong execution capabilities and data performance.
In short, AppLovin's business is divided into two parts: software platform and application. In other words, it not only controls a huge advertising monetization platform, but also has hundreds of popular applications (monetized through its own platform), which can be regarded as the most ideal model for internet companies.
AppLovin's software platform mainly serves game companies that want to acquire customers and monetize advertising inventory (but is also entering the e-commerce advertising market), and its revenue comes from three key products: AppDiscovery, MAX, and Adjust.
The cornerstone of the AppLovin ad platform is AppDiscovery, which is the third largest mobile game In App Advertising network after Google and Meta. The product provides advertisers with performance-based advertising tools to optimize spending based on specific performance goals. AppDiscovery accounts for about 65% -70% of its software platform revenue.
For AppLovin, the top priority of its core AppDiscovery product is the AI advertising engine AXON (which will be discussed in detail later). AXON is powered by data collected by advertisers and publishers who conduct transactions on the network, as well as proprietary data generated by AppLovin's other Line of Business, which greatly facilitates matching between advertisers and publishers. Advertisers and publishers often work with multiple AD Networks at the same time to maximize profits.
The second focus of AppLovin's platform business is MAX, which contributes about 20% -25% of platform revenue. It is an intermediary platform that helps publishers conduct real-time competitive auctions of their advertising inventory to maximize revenue. It is provided free of charge to publishers and generates revenue by charging a 5% fee to third-party advertisers who bid through MAX.
From a business perspective, once the intermediary platform is embedded, it will be troublesome to switch. The analysis provided by the intermediary platform will also be integrated into the business process, resulting in greater transfer costs. Therefore, although the revenue brought by MAX is not as much as AppDiscovery, it has become very important because it collects pricing data from competing AD Networks and publishers. It has a market share of over 60% in the segmented field, providing AXON with a large amount of trainable data.
Adjust is the third product of AppLovin platform business, accounting for about 10% of platform revenue. As a SaaS solution, it helps mobile advertisers attribute user downloads/customer engagement to specific marketing channels/activities. It only accounts for a small part of the total business, but similar to MAX, it provides a large amount of application data for improving AXON.
Apart from the platform business that contributes about 70% of the total revenue, AppLovin also has its own application revenue. As mentioned earlier, it not only controls a huge mobile advertising monetization platform, but also holds hundreds of popular mobile games (developed by 11 internal studios). These games monetize through AppLovin's ad platform and in return, provide exclusive First-Party data to AppLovin.
AppLovin's games mainly focus on casual, match-three, and card games because it believes these games have lower development risks and more predictable returns. In 2023, about 70% of app revenue will come from in-app purchases (IAP), and the remaining 30% will come from In App Advertising (IAA).
2.Always seeking to change, AppLovin's business evolution process
Essentially, AppLovin has always been an advertising company. It decided to enter the game publishing business in 2018 because advertisers and publishers were unwilling to share user data with AppLovin, which was smaller at the time.
And it keenly realized the need for First-Party data to compete with Google and Facebook, so it began to acquire game studios on a large scale. Not only did it monetize newly published games to support the company, but it also used First-Party data to train its ad platform algorithm to optimize placement efficiency and ROI.
Considering the conflict of interest with platform customers, AppLovin's early strategy was not widely welcomed, but the company was not discouraged. By the time of the IPO, the revenue generated by gaming applications accounted for more than 80% of the total revenue. This is one of the key factors identified by management as the "strategic flywheel" behind AppLovin's success.
At the same time, AppLovin's platform revenue has also begun to soar, gradually increasing from 5% in 2019-2020 to over 15% in 2020-2021. Its growth is almost entirely due to the launch of the AI advertising engine AXON, as well as Apple's IDFA changes causing setbacks to Facebook's ad platform and a large number of advertisers reallocating advertising spending to other quickly adapting platforms.
Due to the above factors combined with the optimistic sentiment of the US stock market at that time, AppLovin performed well in its first year of listing. As of the end of 2021, the stock price has risen by nearly 100% since its IPO, and its valuation level is far superior to most peers.
However, in the following year of 2022, AppLovin faced an unfavorable situation. The company failed to meet market expectations and its performance data repeatedly disappointed people. Fortunately, this is not all. Although it experienced a painful period, it executed many strategic measures, laying the foundation for a comeback in 2023.
AppLovin's first major task in 2022 is to integrate MoPub. The company acquired MoPub from Twitter at the end of 2021, another advertising intermediary platform and the second largest player in the segment. AppLovin decided to close MoPub and migrate customers to its own MAX. Although the process was very tricky, in order to avoid customer loss, AppLovin gave up short-term benefits, paid a $210 million reward, and temporarily halved the 5% intermediary fee. This damaged the short-term financial situation, but the Retention Rate of MoPub's top-tier clients reached 90%.
The integration of MAX and MoPub is of great significance to AppLovin, not only because a new giant has emerged - MAX has become the natural choice for advertisers and publishers to integrate, but also because it provides one of the best data sources in the industry after Apple's IDFA policy.
It is also because of this data source that AppLovin's core growth engine today, the AI learning model AXON, can more accurately identify new advertising pairs, utilize incorrect pricing, and calibrate its pricing behavior to maintain competitiveness. This played a key role in AXON's algorithm upgrade in 2022.
The second important business of AppLovin in 2022 is to decouple the rapidly growing and high-profit platform from its slowing application business. With Apple's IDFA change being widely promoted at the end of 2021, game publishers who rely more on identifier positioning are beginning to feel pressure. In response, AppLovin announced in early 2022 that it is preparing to operate the application business as an independent department and explore the possibility of selling or divesting some businesses.
This is a big reversal of the AppLovin "strategic flywheel" story mentioned earlier, but it was necessary for AppLovin at that time. Because the policy change of IDFA reduced the efficiency of cross-application tracking and weakened the importance of the department. In addition, the attitudes of advertisers and publishers were also changing at this time. They realized the benefits of sharing more data with AXON and decided to reduce their dependence on application business. By the end of 2022, AppLovin reduced the number of game studios from 20 to 11, further focusing on platform business.
Unfortunately, in 2022, with the impact of the COVID-19 pandemic and the reduction of advertising spending by top players in the market, AppLovin's growth momentum began to slow down, and its revenue remained flat for three consecutive quarters. Fortunately, although the business appears to be stagnant on paper, the AppLovin R & D team is working hard to develop the next version of the Machine Learning algorithm - AXON 2.0, which will eventually bring about a huge change. This ultimately played a huge role in AppLovin's recovery in 2023.
2023 is a year of return for AppLovin. It launched AXON 2.0 in Quarter 1, with advertising optimization efficiency far higher than the first version, and promoted AppDiscovery to achieve double-digit growth for four consecutive quarters. As of the fourth quarter of that year, its platform revenue growth rate was as high as 88% year-on-year. At the same time, the application business also reversed the downward trend and showed net revenue growth in the second half of 2023.
Due to its strong performance, AppLovin's stock price has surged nearly 300% in 2023. The RockFlow investment research team believes that this is closely related to its multiple strategic initiatives in the past few years.
The acquisition and integration of MoPub ensures its complete foothold in the mobile advertising ecosystem.
The continuous development of software solutions that are highly coordinated with a wider range of businesses has also been recognized by the market.
The separation of software platforms and application departments has resolved long-standing conflicts of interest.
Finally, R & D reinvestment led to the launch of AXON 2.0, helping AppLovin achieve performance growth far exceeding its competitors in a relatively stable market in 2023.
3.With a rise, the 700% increase creates a new legend in 2024
For a long time, AppLovin has enjoyed the benefits of industry tailwinds, with the mobile advertising industry consistently growing at a double-digit compound annual growth rate. Coupled with a steady approach and Line of Business expansion across multiple products, the company is able to share more of the non-game advertiser revenue flowing into the mobile gaming ecosystem.
Not to mention, the AI engine behind its ad platform - AXON 2.0 - continues to benefit from the training of an expanding database, and the growth driven by such algorithm efficiency improvements is non-linear. As the CEO of AppLovin said before (when the actual progress was not smooth):
We cannot predict the progress of technology. But when it happens, it will be a leap in growth. Based on our operating scale, algorithm improvements can bring huge cash flow growth capabilities over time.
By 2024, as the management has planned to launch a full-process intelligent solution and self-service platform in the coming quarters, the RockFlow research team believes that we can expect to see its growth prospects remain strong. At the same time, AppLovin is increasingly benefiting from new stories - the continuous optimization of advertising business by AI engine AXON 2.0 and the continuous progress of e-commerce advertising exceeding expectations.
According to relevant data, global digital advertising spending will increase from $136.07 billion in 2024 to $175.66 billion in 2028, with a compound annual growth rate of + 6.5%; in contrast, the game advertising market where it was previously located is too small, and it is expected to increase from $8.20 billion in 2023 to $13.70 billion in 2028.
The market space has expanded by about 16 times, so it is not surprising that the market is pursuing AppLovin. AppLovin can still seize huge opportunities, and e-commerce will become an important part of its boundary expansion.
AppLovin's stock price rose by 718% in 2024, far outperforming the market and advertising peers. This is largely due to its early good performance in entering the e-commerce advertising market. "Early data exceeded our expectations, and advertising clients in the pilot program received considerable returns. In many cases, our traffic increment was close to 100%."
On the other hand, the data for the third quarter of fiscal year 2024 shows that the revenue 1.19 billion USD (a year-on-year increase of 38.3%), the adjusted EBITDA profit margin reached 60.1% (a year-on-year increase of 11.7%), and the earnings per share reached 1.25 USD (a year-on-year increase of 316.6%). These numbers have exceeded expectations multiple times, and the year-on-year growth rate has once again increased, which adds confidence to investors who believe in the AI narrative.
4.Conclusion
How can an ad tech company achieve a stock price growth of 3300% in 24 months? The RockFlow research team believes that AppLovin's story tells us that true business evolution often begins in despair.
Starting from an ordinary ad platform, AppLovin built a data closed loop by acquiring game studios, creating a unique "advertising + gaming" dual-engine business model. The launch of AXON 2.0 marks a breakthrough in AI in the field of advertising, transforming data value into actual business advantages. From game advertising to the global digital advertising market, it is expanding its target market size from $8.20 billion to over $170 billion.
In the red ocean of digital advertising monopolized by giants, AppLovin has achieved a business miracle through technological innovation and strategic evolution. Its success tells us that maintaining the ability to innovate and evolve on the right track will eventually lead to exponential growth opportunities.
Author Profile: The RockFlow research team has a long-term focus on high-quality companies in the US stock market, emerging markets such as Latin America and Southeast Asia, and high potential industries such as encryption and biotechnology. The core members of the team come from top technology companies and financial institutions such as Facebook, Baidu, ByteDance, Huawei, Goldman Sachs, CITIC Securities, etc. Most of them graduated from top universities such as Massachusetts Institute of Technology, University of California, Berkeley, Nanyang Technological Institute, Tsinghua University, and Fudan University.
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