TIP843: AppLovin (APP): The 30-Bagger Down More Than Half w/ Kyle Grieve & Shawn O'Malley

In today’s episode, Kyle Grieve and Shawn O’Malley break down AppLovin, the mobile advertising platform that went from a failed app recommendation tool to one of the most profitable businesses in ad tech. They walk through how the company makes money on both sides of the ad exchange, why its data advantage has been so hard for competitors to copy, and what caused the market to turn on the stock so violently after a relatively strong quarter. Along the way, they dig into the founder’s track record, the buyback program that made early shareholders rich, and whether the growth story still has room to run. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:03:11) How a failed app became a global advertising platform (00:11:52) How AppLovin makes money from advertisers and publishers (00:16:48) Why real-time auctions beat the old waterfall method (00:30:24) What actually protects AppLovin from Google and Meta (00:31:06) Why AppLovin bought mobile game studios, then sold them (00:57:42) How buybacks created enormous value (01:08:50) Details on the executive comp structure (01:13:59) What we think triggered the post-earnings collapse (01:19:14) Where the next leg of growth could come from (01:28:39) Valuation discussion of AppLovin (01:30:05) Intrinsic Value of AppLovin (01:30:26) Whether Kyle & Shawn will add AppLovin to the Intrinsic Value Portfolio Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Track ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Portfolio⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about how to join us in NYC for our ⁠⁠⁠⁠⁠⁠⁠⁠Intrinsic Value Conference⁠⁠⁠⁠⁠⁠⁠⁠. Portfolio Review ⁠⁠⁠⁠⁠⁠⁠Submit Tool⁠⁠⁠⁠⁠⁠⁠. Check out our previous Intrinsic Value breakdowns: Alphabet, Meta, Reddit, Trade Desk, Uber. Follow Kyle on ⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠. Follow Shawn on ⁠⁠⁠X⁠⁠⁠ and ⁠⁠⁠LinkedIn⁠⁠⁠. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Investor’s Podcast Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠sponsors⁠: Monarch Plus500 Scribe Plaud Netsuite References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

• 0:00Speaker 00

  You're listening to TIP.

• 0:03Speaker 01

  Welcome to the Investors Podcast today on episode 843. So on our last episode, we got to dissect a 5X that we actually ended up passing on. And I had a really, really good time digging into your investing thesis together and just kind of helping us both improve our own investing process. It was really self-reflective and it was a lot of fun.

• 0:20Speaker 02

  I think it was a great exercise, but today we're going back to analyzing a brand new business. We haven't looked at before. And this one is interesting because it is very much growing like an early-stage startup is immensely profitable, yet it is one of the biggest losers year-to-date in the market with its shares falling over 50% in 2026.

• 0:40Speaker 01

  So AppLovin is the name of the business that we're going to be looking at. And I think it's one of those classic businesses that the market definitely loved in the past. And it's easy to see why. You had lots of growth, you had high and growing margins, and then you had minimal capital requirements to boot. So my honest starting point when I was going through this business's filings was, are we wrong in not owning this business at its current price? Because a business with the numbers that AppLovin is putting out, I just would never think that this would be the type of business that would be lumped as a value play. But the numbers that the market is offering for this business is definitely in value territory now with a mid-teens multiple.

• 1:12Speaker 02

  It was definitely a quality growth story for a long time. And so now that there's a value angle, you definitely have sparked my interest. So let's get into it.

• 1:23Speaker 00

  Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Kyle Grieve.

• 2:08Speaker 01

  We've done quite a lot of work looking at businesses that specialize in advertising on the show. We own Alphabet and Reddit, which I'd say are direct advertising platforms, even though they have other products associated with those companies. But then we also own some companies that are still doing advertising, but in a more indirect way. Think Uber, Amazon, and Netflix. These are businesses that have an advertising angle to their business, even though they aren't necessarily known for it to the same degree as maybe a Google or a social media platform like Reddit. So today, I'm excited to discuss another direct advertising play, AppLovin. So what initially attracted me to this name was the fact that this business was number one on Yahoo Finance's list of businesses trading closest to its 52-week lows. If I told you this, you'd probably think,

• 2:50Speaker 01

  well, this is some crappy business that is falling apart or leveraging up while allocating capital poorly. But I think you'd probably be wrong on that as it pertains to AppLovin. So as AppLovin continues growing at some pretty eye-popping rates, the revenue is increasing. It just increased about over 50% year-over-year, all while capital efficiency numbers continue to improve along with operating income.

• 3:11Speaker 02

  It reminds me a lot of the Trade Desk. They have similar business models. And for a long time, the numbers at the Trade Desk looked incredible, and the stock kept going up and to the right. And now that's a company that has entered value territory, as some people would frame it. And so, yeah, Daniel and I covered that business, and it really is in this same kind of area of programmatic advertising, with the main difference being that AppLovin focuses more on showing ads in mobile apps, while the Trade Desk focuses more broadly on the connected TV ad space and this idea known as the open internet. So outside of areas like Google and Facebook, other forms of advertising outside of the walled gardens, as they're called. And so

• 3:54Speaker 02

  there is one striking similarity that is fairly obvious, though, and that's that both stocks have been absolutely crushed due to AI disruption concerns this year.

• 4:05Speaker 01

  Right. And we've largely taken the standpoint that we think there are a lot of really, really good software businesses out there that we don't think deserve to be crushed the way they have by the market. Businesses inside of the intrinsic value portfolio, such as Adobe, CoStar, Intuit, and Reddit, all seem to us like pretty high-quality businesses with the ability to continue to increase revenue, even as AI creates this new type of uncertainty that they haven't faced in the past. What I think I really want to figure out today about AppLovin is whether AI is a real threat to the business model and whether this business is of sufficient quality to maybe deserve a spot in the intrinsic value portfolio.

• 4:38Speaker 02

  Between the three of us, me, you, and Daniel, we've covered so many businesses. Some are super-high quality, some not so much. But the problem that value investors often run into is whether a sufficiently high-quality business is actually worth owning at current prices. And so we both know Costco is an exceptional business, but the price has really never made sense to me. Maybe I'm too biased by some value investor roots, but that's why we don't own it. At 50 times earnings, it really feels like there's nothing close to a margin of safety baked into, you know, what is a grocery and retail business.

• 5:12Speaker 01

  Right. And to better understand any business, whether that's Costco or Reddit, I think going back to figure out exactly what problems they're trying to solve is a great starting point. Now, just to give you an idea of AppLovin's scale, their growth advertising spend on AppLovin is more than Pinterest, Snapchat's, and Reddit's combined revenue. And naturally, the advertising spend on AppLovin is generated a ton of value for advertisers. Otherwise, they just simply wouldn't be there. They'd be somewhere else. So advertisers' common goal is basically to generate revenue in excess of their advertising spend. And AppLovin specifically wanted to be the vehicle to help them accomplish this with a very, very major focus on casual mobile games. Think of games like Candy Crush, Solitaire, or Mahjong. But now AppLovin is trying to

• 5:54Speaker 01

  diversify into other markets outside of that gaming vertical as well. So the two core products that AppLovin offers brings publishers and advertisers together. AppLovin acts as kind of an intermediary between the two, aiming to maximize the efficiency of ad spend from the advertiser's perspective, while offering the publisher the highest possible bid for its advertising slots on its own mobile games. So AppLovin is basically sliding right in the middle, making money on the difference between how much an advertiser will spend and how much the publisher needs to be paid to deliver a specific result for those advertisers.

• 6:25Speaker 02

  It's a really interesting product, but from my understanding, there is a really interesting backstory here, too, that I think we should share because it's, it's pretty wild.

• 6:34Speaker 01

  It is, it is. So their founder and CEO, Adam Froggy, has quite the track record of success. So he successfully launched two other advertising tech companies, LifeStreet Media and Social Hour. These were both desktop-based businesses, and they focused much more on social ads. So, you know, the writing, I think, was on the wall that he could probably continue to succeed in his third venture, specifically with AppLovin, which at its core is an advertising technology company. So back in 2011, he launched an app that would help you find mobile games that your friends were playing. So let's say you had a friend playing Words with Friends. It would suggest that you go play Words with Friends with your actual friends. So the app in Adam's words stunk, but the key finding that he had from that app was in this recommendation algorithm.

• 7:17Speaker 01

  So this was when the app recommended a game to play, so you could maybe just connect with those friends. And the response rate on that connection was actually really, really high. And this is essentially what started AppLovin, the recommendation engine.

• 7:28Speaker 02

  Origin stories are always so funny because sometimes the origin of a business is just nowhere near what the business is today. And I think you can probably go down the line of some of the businesses we own in our intrinsic value portfolio and see that illustrated, right? Amazon, for instance, focused on originally selling books online. And today, I would be surprised if they even made a fraction of 1% of their overall revenue from selling books. So needless to say, technology businesses for sure tend to change, and they sort of have to get with the times, or they get quickly left behind.

• 8:03Speaker 01

  Yeah. I mean, if you're in technology, by definition, you basically have to continue to innovate. It's basically just part of the game. But the story doesn't really end there because even when they found the recommendation engine, they actually started with ads and focused just on mobile games. And so the reason back then was simple. So it was 2012, and mobile game developers were really trying to figure out exactly how to make their games into a profit engine. And advertising was really kind of the low-hanging fruit, and I still think it is today. So they focused on using the recommendation engine only with the app developers on one side and the advertisers on the other. By 2012, they were looking for more funding. So Froggy first scoured the VC universe to find someone to help fund the company, but he actually didn't

• 8:44Speaker 01

  have any luck. And he settled on an angel round of about $25 million. So, you know, it started very, very small. But he said that he learned something really important here, and that's that if he'd had a board, perhaps, he would have received some better advice on this end of things.

• 8:58Speaker 02

  Well, what were some of those mistakes he felt that he made by not having a board of directors assisting him?

• 9:05Speaker 01

  Yeah. So he listed a couple. So he actually didn't have a board all the way until 2018, which was basically meant the board was just him up until that point. And so he said the mistakes were mostly related to capital markets and raising capital. So because of this setup, if you look at just what was good about not having a board, you know, he had basically total control of the business. Every single decision flowed entirely through Adam. And I think that was probably a pro because it helped him create the company in the best way that he saw fit, and he didn't have to rely on other people's opinions. So if we look through AppLovin's history, there have been other pros and cons as well about not having that board. So if we look at 2015, the business, again, it was going super fast back then.

• 9:47Speaker 01

  That's going to be a common theme today. And it was about to hit about $50 million in EBITDA. So a tech company at that time approached him. They were obviously very, very intrigued by the business and they offered about $600 million in cash. And he ended up walking away with that, hoping for a valuation that would have been closer to a billion dollars. So in that sense, Adam actually felt that a board probably would have been not good for him because he feels that they probably would have pressured him to actually take that $600 million offer. And just to give you an idea of how big a mistake that would have been, the company is now valued at a little over $100 billion today. And at the end of 2025, they were worth nearly $250 billion. Now, as for a pro of having a board and an example that he gave, so he said that in 2016, again, he was offered to sell a majority stake in that business to a group of Chinese investors

• 10:32Speaker 01

  for about a $1.4 billion valuation. So it was later revealed that the buyer was a partially state-owned business. So the regulators ended up stepping in and made major changes to the deal about a year later, based on national security concerns. So he felt that if he'd had the board at this time, he probably could have surrounded himself with more people that would have been familiar with these types of deals. And they probably would have just told him to walk away from it a lot earlier and not drag this issue on for about a year if that it took.

• 10:59Speaker 02

  Yeah, I think if you would boil down what boards are for in theory, it's checks and balances, right? So having a board doesn't guarantee that there will actually be checks on the CEO's power. So that's when you get into more complicated conversations about how to structure corporate governance, who should be on the board, all that kind of stuff. But without a board, you just increase the volatility of decision-making at the top of the company. And the CEO might make some brilliant decisions on their own in hindsight, but they're also going to make avoidable mistakes.

• 11:34Speaker 01

  Exactly. So there's tons of more stories involved with how this business got to where it is today. But I think the best way to understand AppLovin is really to just kind of break it down to its parts, all of which have been either acquired or internally developed over time. So if you don't understand the advertising space, it can be a little confusing to understand just how AppLovin works. So at its core, AppLovin is made up of four different segments. So one note to consider is that even though AppLovin has these four segments, it basically treats them all as one inside of their financials. So if you're looking for segment breakdowns, you're not going to find them. Anyways, here are the four segments. So the first one is the AppLovin Ads Manager. This is their user acquisition solution, or UA. This helps advertisers, maybe such as a brand like Athletic Greens, pay to acquire new customers.

• 12:18Speaker 01

  This was recently rebranded from Axon Ads Manager, so I will be using them interchangeably throughout the episode. So the second most important part of this business is called Max. So this is on the publisher's side. And it helps publishers get the highest bid for their advertising space. If you've played a game like Candy Crush and you see an ad in there, there's a good chance that Max is working with the publishers to show you that specific ad. Number three, we have Adjust. And this is a measurement and analytics tool that helps provide data to marketers to help improve their app marketing. And fourth, we got World, which is a connected TV platform that distributes streaming video for content companies to attract viewers and maximize revenue. This was kind of the area that the Trade Desk was talking about that Sean mentioned earlier. So AppLovin also used to have their own apps business, but they ended up divesting that. We'll briefly

• 13:03Speaker 01

  touch on Adjust and World today. But just keep in mind, the two most important parts of this business are definitely the AppLovin Ads Manager and Max.

• 13:11Speaker 02

  Well, then how about we start with Axon, the Ads Manager? Take us through a real example of the role they would play.

• 13:18Speaker 01

  So let's imagine you're a well-known brand, such as Wayfair. You have an advertising budget, and you know you need to get some sort of return on that investment. Of course, you want to generate more revenue than you spend on advertising. So Axon Ads Manager has basically built in this predictive algorithm that I brought back a little while back. And this helps their advertisers basically optimize their spend. So, you know, let's say you're in marketing for Wayfair. You want to use Axon Ads Manager to set what kind of return you want on your advertising goals. So a good measure of this is something called return on advertising spend, or ROAS, which basically means the amount of gross revenue you receive as a percent of your advertising spend. So let's say you spend $100 on advertising and you receive about $500 in gross revenue.

• 14:01Speaker 01

  Well, then your ROAS would be 500%. There's plenty of other metrics, but I don't want to get too backlog there. But you know, there's things like downloads, clicks, impressions, or actions. But at its core, you know, advertisers, they just really want to generate real revenue from their advertising. Now, another thing worth mentioning is that AppLovin discloses that substantially all of the revenue from fees collected are from advertising spend on Axon Ads Manager. They don't actually disclose the exact breakdown, though, for this segment or even the other segments.

• 14:30Speaker 02

  So the podcasting industry runs on a lot of these similar metrics. I think we're both familiar with the jargon, but it is a lot of new terms for anyone not familiar with the space. And it can be more complicated because while generally advertisers are spending money to make money, there also can be very different goals across campaigns, depending on the brand. And so some campaigns are based on brand awareness with the goal is to simply try and reach as many people as possible. Whereas other campaigns are actually about achieving a call to action. So getting someone to download an app, purchase a product, sign up for a newsletter, whatever it ends up being. And so when you see Coca-Cola, for example, running ads at the Super Bowl,

• 15:13Speaker 02

  those are what you would call brand awareness ads. They're not trying to get you to go buy a Coke at that moment, but they want to influence you subconsciously the next time you're in a position to buy a beverage, whenever that is. And so on the other hand, I'm sure everyone has seen ads online that are very specifically trying to get you to sign up for a product, put in an intro discount code, or share your email to unlock a discount, stuff like that. Those are more action-based advertising campaigns.

• 15:42Speaker 01

  Great, great definition there. So Axon Ads Manager, I would say, kind of helps define their framework for their ad campaigns. So if we go back to that Wayfair example, Wayfair might spend something like tens of thousands of dollars per day on ads. And so Axon will help them set goals. So kind of to what you just said there, Sean, what are your goals? Who knows? Let's say that Wayfair wants to help create its own lookalike audience. It'll set a target return. Wayfair would then determine the ROAS that they want, and Axon would handle the rest, masking the ad spend to the right users to help meet those benchmarks. So the other thing that's really important to understand here, that's kind of complicated, again, if you're not in the ad space, is that Axon is dynamically priced. So there's not a flat fee. The cost

• 16:24Speaker 01

  scales with the value of the users that Axon helps find for the advertiser. Axon will help them recalibrate the model as more data flows back. This further helps increase the conversion towards the ROAS target. Lastly, Axon also has these kind of really, really deep reporting capabilities, which can show how much lifetime value a cohort generated, rather than just how many people saw a specific ad.

• 16:48Speaker 02

  So my understanding is that Axon Ads Manager is what's known as a demand-side platform, meaning they work with the brands wanting to buy ad space from publishers, hence demand. And the Trade Desk as a company actually strictly operates as a demand-side platform to minimize conflicts of interest. And so it's sort of like real estate, to grossly, grossly oversimplify. You don't necessarily want one agent representing the buyer and the seller. Each side wants to have their own independent agent working to get the best deal possible for them. So Axon, as a segment, tries to focus on the buyer's side. But as a company, AppLovin

• 17:30Speaker 02

  does represent both sides. And so if anybody who knows Trade Desk well, that would be one interesting point of comparison and how they differ. And on that note, how about we do look at the other side of this marketplace? AppLovin is not only offering services to advertisers, but also to publishers, which is the sell side of this equation, and they're selling inventory. So what does that look like?

• 17:55Speaker 01

  Exactly. So let's imagine that you're the developer of a solitaire game. So you have a really, really large user base playing your game, and maybe you want to decide, okay, well, I want to generate some more revenue from this game. You'll see AppLovin's Max service, and let's say you decide to give it a shot. So basically, the way it works is every time a player finishes a level on a solitaire game, for instance, the app will then show them an ad, and the solitaire game will get paid for the advertisement that's shown to its users. This could be through an ad company like AppLovin, or through Google, Meta, or some other smaller companies. Now, all of these companies are willing to pay the developer to show ads in their slot, but obviously only one ad is going to fit in there. Now, the old school way of deciding who wins is called a waterfall.

• 18:38Speaker 01

  This is more of a fixed priority list and it's not auction-based. So here's how that would work. Solitaire ranks the ad companies from top to bottom based on the historical averages of who pays the most. Maybe, let's say, Google's number one, AppLovin's number two, and Meta's number three. So now, let's say, an ad slot opens up. Solitaire is then going to reach out to Google, who traditionally pays the most, and ask them if they want to buy the impression at a specific price. Now, let's say, Google, for whatever reason, they decline. Maybe they just don't get the price that they want to meet their goals. Then, Solitaire will then reach out to AppLovin next. So the request basically falls down to the next company on the list and so on, like water spilling from a waterfall, hence the name waterfall. So whoever basically answers yes in the fixed order will win that advertising slot.

• 19:21Speaker 02

  I think it makes some sense intuitively, but I do see a few problems with the model. I mean, first, you get wasted ad slots. So while you have a request that's trickling down the waterfall, you're waiting to see if a company wants the ad space or not. And so then that means the slot can remain empty for a time. And then your Solitaire app isn't collecting any money on those ad slots. And then, secondly, you run the risk of offering underpriced ad slots. So the company who eventually wins isn't necessarily the same company that would be willing to pay the most for that slot. And so, for instance, let's say, Google wants a specific return on advertising spend, and they say they'll pay $100 to earn their desired return.

• 20:05Speaker 02

  And then they win and end up paying $100 for the slot, but maybe AppLovin or Meta was willing to pay 110. And in that case, the developer or the publisher is not getting the best possible price for that ad slot. They're leaving $10 on the table.

• 20:20Speaker 01

  Yeah, and this is exactly the type of problem that AppLovin's Max product has tried to solve. So what Max does is it basically changes the fixed sequence method to a real-time auction. So what this basically means is whenever, let's say, that Solitaire game has an ad slot that opens up, Max will then ask all of the ad companies to bid on it simultaneously. And whoever has the highest bid wins that ad slot. This kind of bypasses that fixed pecking order and delays, which obviously, like you just mentioned, Sean, costs Solitaire some real money. Now, the Solitaire example is good because it's actually a real case study. So Triple Dot, which has a Solitaire game, ended up switching from the waterfall method to test out Max. And their data actually showed that their average revenue per daily active user

• 21:02Speaker 01

  rose by about 20% in A/B testing across their entire game's portfolio. So, you know, for a developer, instantly increasing advertising revenue by 20% is definitely not significant, especially given just how many users they have. When breaking down that revenue lift, the boost kind of came from these two main areas. The first was in fewer wasted impressions, and the second was in higher price per impression.

• 21:24Speaker 02

  This is great data. And the difference between the waterfall method and the auction-based method, it seems like a complete no-brainer for a developer to use, but it's definitely not all sunshine and rainbows. Looking at the largest position in our intrinsic value portfolio, that would be Alphabet, and they've faced a major antitrust challenge in their advertising business. In 2025, a federal judge ruled that Google illegally monopolized key parts of the open web advertising market, finding that it used its control of the publisher ad server and ad exchange to favor its own ad X exchange over competitors. And to try and put that a little more simply, Google controlled multiple layers

• 22:05Speaker 02

  of the auction process and gave itself advantages at rival exchanges that don't have those same levels of control. And so, under one system, advertisers could win impressions when competitors were willing to pay publishers more. Under another advantage, Google could see a rival's winning bid before responding. And that obviously is not what publishers want from a supposedly competitive and open auction. And so, Google eventually removed some of these practices, including, most controversially, something known as the last look advantage amid pushback from publishers and regulators. But regulators in the court did ultimately conclude

• 22:48Speaker 02

  that its broader conduct still harmed competition.

• 22:52Speaker 01

  Right, and while this obviously is a bad thing for Google, I think it also just shows how strong Google is. You know, many investors like monopolies, and here you have regulators targeting Google exactly for that reason. Now, AppLovin, to me, isn't anywhere close to an monopoly, but we'll touch on that a little bit later. But let's have a look at AppLovin's other two segments, which I haven't discussed much today, and Adjust and Whirl. So Adjust, to me, seems kind of like an augment for their Axon product. You know, if advertisers want better insights into the customers that they're showing ads to, well, then Adjust basically provides that ability for them. It helps them, for instance, see the journey of the viewer of ads across all their channels to see which specific ad source drove the best conversion. And, you know, this is kind of like a SaaS-type product and has an annual subscription fee.

• 23:36Speaker 01

  So from what I was able to find, the median fee on this product, according to vendor.com, is around $44,000 per year. Now, Whirl would work with a streaming content company or a connected TV platform. Basically, a streaming content company would use Whirl to plug its channels into an advertising demand specifically from AppLovin's side. And this then helps the customer launch, let's say, an ad-free-supported channel and then monetize it. Revenue on Whirl is on a usage-based or cost per 1,000 views.

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• 27:11Speaker 01

  All right, back to the show.

• 27:13Speaker 02

  And so for AppLovin, how exactly do they earn revenue from facilitating these exchanges? I mean, I assume there's a spread between how much advertisers are willing to pay AppLovin on the Axon side, and then they can see how much publishers are willing to accept from the winning bid on the publisher's side. But is there, is there anything more to it?

• 27:33Speaker 01

  Yeah, you're essentially completely correct there, Sean. So AppLovin reports on a net basis. So they're considered an agent basically in the transaction rather than the principal, meaning that the revenue that you see on the income statement is actually already net of what they paid out to publishers. Now, that's actually the more conservative accounting treatment, but it also means we can't directly observe this spread that AppLovin is capturing between advertisers and publishers. So this is kind of annoying because it would be nice to know what those numbers are, but they keep them proprietary. So you kind of have to take your best guess. So the general public estimates that I came across were somewhere in the 30 to 40% range. Now, that estimate basically represents the difference between what an advertiser pays and then what the publisher receives. So let's say that we

• 28:16Speaker 01

  use $100 spent by the advertiser, the publisher is then getting $60 of that, while AppLovin pockets the remaining $40. Now, the thing that I find interesting about AppLovin is they theoretically could capture more of that spread over time without actually squeezing advertisers or the publishers. So if AppLovin can continue to better match each side of the transaction to give the best results to both parties, well, then advertisers would be more willing to pay a premium. And if they can find an advertiser willing to pay, let's say, a $20 CPM instead of a $13 CPM, well, then AppLovin gets to keep a piece of that difference.

• 28:49Speaker 02

  And so that's kind of the flywheel of this business, isn't it? Better matching creates more value, which lets AppLovin take a bigger spread or attract more publishers and advertisers that gives them more data and then further improves their ability to do this matching.

• 29:05Speaker 01

  Precisely. So let me put a few numbers on it, just so people understand the two sides of the platform and how much just scale there is already inside of it. So Max reaches up to 1.4 billion daily active users across more than 140,000 apps. And so that's kind of where they're getting the liquidity. And because it's a unified auction rather than a waterfall, every eligible bidder gets a shot at every one of those impressions. And the winner can also just come from anywhere. It's not just coming from AppLovin's side of things.

• 29:34Speaker 02

  It's good to see that AppLovin seems to have protected itself well from that potential regulatory overhang that Google had to deal with.

• 29:42Speaker 01

  Yeah, I think it really is. And I know you're not a fan, Sean, of businesses that are highly regulated. And it appears that, at least for now, AppLovin seems to be in a pretty safe spot. But I think the real advantage for AppLovin is just how Axon Ads Manager interplays with Max. So Axon takes the advertiser's budget and creative and figures out which publisher slots to put it in. And because it has this structural advantage of having access to data from Max, it gets a very, very rich data set to see how certain ads perform on Max versus, let's say, using an off-Max platform. And as I discussed in this example earlier, Max has a really, really good job of giving publishers the best possible deal, which is often a lot higher than the alternatives. So, you know, what it really comes down to is that flywheel that you just mentioned. If AppLovin is doing everything

• 30:27Speaker 01

  right, advertisers are going to be more than willing to continue paying AppLovin for more use of Axon, simply because the impressions they get are going to be much more valuable on AppLovin versus an alternative, since they just convert better.

• 30:40Speaker 02

  Yeah, it makes a lot of sense that they can create value as a middleman here because we see agent intermediaries involved in a lot of two-sided industries from real estate, which we mentioned earlier, to digital advertising, as we're talking about today. But what you just described in the matching of advertisers and publishers also sounds very replicable to me, which I say, knowing that it probably comes off as a bit naive, but still, what stops these giant advertising companies like Google or Meta from being able to come in and take over this market and do it better than AppLovin?

• 31:14Speaker 01

  Yeah. So, you know, if I'm being honest, I think this is where AppLovin starts to get a little tougher to understand, at least for someone like me. So like you just mentioned, I think it seems pretty straightforward, given AppLovin's product offering. And it makes sense from both an advertiser and publisher's perspective to use AppLovin's products. But, you know, if AppLovin can do this, well, what's stopping Google or Meta or Unity from just replicating the strategy? And why hasn't AppLovin taken even more of a market share than it already has? So unfortunately, AppLovin, they do have a number of competitors on both the advertising and publisher side. So Google, for instance, is a competitor on both sides of that competition as well. So Google has its Google AdMob product. This product, just on the publisher's side, also uses a bidding process. They offer analytics and they offer other automated tools.

• 31:59Speaker 02

  So the audience is learning quickly. This is why we decided to pass on the trade desk and why I still haven't opened a position in that stock despite it falling 75% from the date that we published our episode on it. After, you know, from 2015 to 2025, it was the epitome of a compound or bro stock. And, you know, people would point to it and say, this company is going to keep growing up and to the right. And they're perfectly illustrate what quality growth is, and they've never missed in earnings. And really, it seems like that turned out to be too good to be true, based on just how dramatically this stock has fallen off now and the swing in narrative surrounding it. And so it's just really hard to get an advantage in the online advertising space, because you do

• 32:43Speaker 02

  have these large tech behemoths like Google and Meta, and they have such a strong hold on the space that it makes it very difficult for competitors to establish any kind of meaningfully sized niche that they can protect and fend off competition from. At, you know, at a $250 billion market cap at one point for AppLovin, they're certainly starting to reach that size where the niche that they dominate would be material to the economics of some of these big tech giants.

• 33:16Speaker 01

  Yeah, I mean, totally true. And even if we just avoid the big tech giants for a second year, we also have to take into account that there are smaller competitors out there as well, that I think have carved out a pretty decently sized niche for themselves, and they're just not really going away. And I think there must be a reason for that, right? I mean, there has to be. After all, if a business like AppLovin was such a bad business, well, then it probably wouldn't have been able to compound revenue at nearly 40% with operating leverage on top of that. So what is it about AppLovin that has allowed it to become a somewhat durable business while kind of growing fast, expanding its ability to generate its margins as well as just gushing cash? And to answer that, I think we first need to understand that AppLovin has done a pretty brilliant job of understanding

• 33:58Speaker 01

  its customers, which I definitely think is key to its competitive advantage that it now has. Now, earlier, I mentioned that AppLovin used to own a number of gaming companies that they eventually sold. Now, this actually wasn't done just because they wanted to get into the gaming industry. Froggy has actually said that he doesn't even like games.

• 34:15Speaker 02

  Yeah, I was wondering about this. I mean, it does seem strange to me that they had these gaming studios and then sold them off. And that didn't seem like a necessary set of assets for AppLovin to have. But I guess there's probably a good backstory here as to why they would have bought them in the first place.

• 34:32Speaker 01

  Yeah, there's definitely a good reason here. So they ended up buying these studios because in AppLovin's earlier days, they needed to basically gather data from their publishers. Now, when AppLovin was a younger company, they obviously didn't have access to the data that a business like, let's say, Meta would have from generating its own use of pixels, which are kind of this embedded piece of code that advertisers would use to generate analytics. Now, I remembered actually, a long time ago, I briefly used Meta's ad platform and went through their process of setting up my own pixel to access data. Now, while that's great for advertisers and Meta, this doesn't really do anything for a business like AppLovin, which obviously wouldn't have direct access to that data set to use on their own customers. So instead of just closing shop, they decided to just

• 35:14Speaker 01

  buy the studios themselves to generate their own data on the games that they controlled. And that would help allow them to see real time performance on their own tools like Axon and Max. Now, this data also helped feed the recommendation engine, which obviously improved even more the targeting for advertisers and helped monetization for their own developers, not only including their own company-owned studios, but also other companies that they were acting as an agent for.

• 35:40Speaker 02

  I think it's pretty similar to the idea of like a strategic IP carve out. And folks who have listened to this podcast for a while or who have followed me certainly know that I love to mention Uber. It's one of the companies that I'm most excited to be a shareholder of. And just continuing to invoke Uber whenever I can shamelessly. In 2020, the company acquired its rival in the Middle East, a company known as Kareem for $3.1 billion. And so Uber wanted access to Kareem's regional ride hailing supply network to integrate into its own app, soaking up market share and then adding to Uber's scale advantages. But Kareem was not only a Middle Eastern ride hailing app. It was something like a super app, maybe

• 36:24Speaker 02

  closer to a company like Caspi in Kazakhstan. And so it included other segments like grocery and fintech payments. And these segments were not only outside Uber's wheelhouse at the time, but were also losing money. So Uber carved out these assets by selling them for a few hundred million dollars, cleansing their balance sheet and allowing them to focus on what they do best.

• 36:47Speaker 01

  I just knew you'd fit Uber in there somehow. But I think that's a really, really good comparison. You know, AppLovin ended up selling these gaming studios to Triple Dot in 2025 for a total value of about $800 million in cash and stock. And I think this really helped allow them to redeploy the capital into some higher margin parts of their own business. It also acted as an ability to help them focus more just on the advertising business and less on anything else that would distract them from that specific purpose. Now, the fact that they took a stake in Triple Dot, I think, was also strategic. So it helps maintain some relationship between these studios and Max while removing the need to deploy capital or time into the gaming industry.

• 37:27Speaker 02

  So since they got access to this data, I can only assume they've taken advantage of the ability to monetize it, which I'm sure has helped underpin these mind-boggling growth numbers that we've seen from the company. But maybe it's just because I find the space so confusing. I'm still not sold on AppLovin's competitive advantages. And on the one hand, I think, yes, their success does suggest that they've carved out a niche clearly that Alphabet and Meta have not been able to consume. But on the other hand, the more they grow and prove that this can be a hugely profitable space for them to operate in, you have to wonder whether that will catch competitors' attention. And so I think just at a high level, this is a challenge that any dominant niche player faces

• 38:12Speaker 02

  as they scale up and start to step on the toes of the big boys. You know, oftentimes that's going to lead to a niche player getting acquired. But if an acquisition is too expensive for the acquirer, then competitors might try to build their own parallel businesses from scratch, and that would be a real problem for AppLovin.

• 38:33Speaker 01

  You're a hard man to sell, Sean, but I'm going to keep trying here. So using the story above, we can see that AppLovin has built its advantages over this multi-year time period, right? So even if a new entrant, let's say, comes in with billions of dollars to spend, and let's say they want to compete with AppLovin, it would still probably take quite a bit of time for them to reach the same level of scale that AppLovin has reached over this, you know, multi-year time period. So if I had to nail down a competitive advantage to just kind of one thing here, I'd probably go with scale economics and maybe this data learning flywheel. Now, on that second point, this comes more from a decade of building distribution, advertiser relationships, as well as machine-based learning systems, which today generate an enormous stream of fresh data and feedback that they've been

• 39:17Speaker 01

  able to monetize. But these types of competitive advantages still, to be honest, kind of scare me, because it's pretty obvious to me that there are other businesses that are out there that think they can replicate some of AppLovin's success. For instance, Liftoff Mobile just went public in June of this year, and Legacy's Liftoff started primarily on the demand side, but after merging with this other company called Vungle in 2021, it now has both a demand side and as well as a supply-side platform. So, you know, it's been building mobile ad technology for well over a decade and operates across both gaming and non-gaming apps. So, you know, I would definitely consider it to be a meaningful competitor. And then on the mediation side of competition, the real rivals, probably Unity's LevelPlay.

• 39:59Speaker 01

  So one study that I found regarding that from 2025, they found that Max is roughly 55% of ad monetized top grossing games versus about 25% of Unity's LevelPlay and about 13% for AdMob. So, you know, they do have a pretty big market share.

• 40:15Speaker 02

  It would be fair to say, though, as we talked about earlier in the episode here, with the court cases against Google, that Google's vertical integration across the ad stack has historically created some conflicts of interest, to put it mildly. AppLovin used to be more vertically integrated, so it owned a large portfolio of these mobile apps that provided first-party data and audiences that helped them improve their own advertising technology. But now with that gone, in theory, that has allowed AppLovin to shift its focus entirely toward advertising, and that divestiture reduced some of AppLovin's vertical integration. So it no longer operates the publishers whose inventory its platform also monetizes.

• 40:59Speaker 02

  So at least structurally, AppLovin is now less vertically integrated on the publisher's side than it used to be. There are maybe fewer conflicts of interest, fewer potential red flags for regulators. And so that does not make AppLovin completely neutral. Its own advertising demand still competes inside of Max, but AppLovin says its demand receives no preferential treatment and that the highest bidder wins. And of course, they say that, but I assume there's some truth to that.

• 41:28Speaker 01

  Yeah, I think Max is powerful because it sits in that mediation layer between the publishers and competing ad networks. So for every impression that's monetized through Max, AppLovin is really sitting in the middle of that exact decision process. So eligible demand sources submit these real-time bids. Max compares those bids alongside any non-bidding demand source, and then they just determine which ad to serve. But AppLovin also participates on the demand side of those auctions as well. So in effect, it operates the marketplace while competing within it. AppLovin says its own demand receives no preferential treatment, like you just said, and that the highest bid wins. And as far as regulators are concerned, as far as I can tell, there's talking the truth on that front. So Google

• 42:09Speaker 01

  can offer and already does offer a very similar mediation model through AdMob, while Meta supplies demand to third-party publishers through the audience network. So the moat isn't necessarily that Google or Meta are technologically incapable of replicating Max. I think the stronger question is probably whether AppLovin's scale in the publisher mediation gives it data liquidity optimization and a distribution strategy that becomes more and more difficult for competitors to try to overcome.

• 42:35Speaker 02

  It sounds like Meta and Google are competitors in some ways, but they aren't apples-to-apples competitors for the reasons we just discussed. And there was another thing that really blew me away when I was doing some of my own research to prep for AppLovin here, and that was that I wanted to speak to some of their competitive advantages and how lean of an operation it is. The EBITDA margins and EBITDA as a proxy for operating profit, you know, before debt, financing costs, and these other things, you know, it's more pure measure of the business's profitability. It's over 79% over the last 12 months. And that just shows clearly it's an incredibly asset-light business. There's

• 43:15Speaker 02

  not a lot that falls into the income statement that reduces their profitability, which is a very good thing potentially for shareholders and their ability to create value for shareholders over time.

• 43:29Speaker 01

  Yeah, the margins in this business are some of the best that I've ever seen, and I think that stat really just blew my mind. But there's another stat that also blew my mind. So if you look in the trailing 12 months, AppLovin has an average revenue per employee of $7.6 million, and with profit margin of nearly 65%, profit per employee is also running into the multi-millions. Now, like most software companies, you can probably tell where much of this operating leverage is coming from. You know, they don't need too much incremental expense to scale up the number of advertisers and publishers that are already using their platform. So as they get more and more customers and they're spending more and more money, they get that massive operating leverage tailwind. Now, the other part of this is also, I think, embedded inside of their CEO, Adam Ferogi.

• 44:13Speaker 01

  He mentioned that they have kept very, very lean, completely on purpose. For instance, they limit the number of managers to ensure they aren't going through too many bureaucratic layers that can clearly impact margins. And I think that's a pretty good advantage over a competitor who thinks they could just hire, you know, 5,000 people to try and beat AppLovin. Chances are their unit economics are going to be much worse than AppLovin's, which I think helps AppLovin's competitive position to some degree.

• 44:38Speaker 02

  And just as we were looking at this chart here for AppLovin, there's been some huge volatility in their operating margins that I'm hoping you can maybe provide some context on. From 2022 to 2023, margins went from 17.7% to almost 70%. So that's a pretty big change in a 12-month period, and they have sustained those high margins and growing over the last couple of years. But yeah, what really explains that massive jump in one year?

• 45:09Speaker 01

  Yeah, so I think there's a couple of things that explain it. So the first one that would explain some of that margin compression, I think, lines up with a couple of acquisitions that they made. So MoPub was probably one of their biggest, which was, I think, for over $500 million. And this was actually a really, really good use of capital as it added a lot of talent to their staff, but it also added some more gap expenses like depreciation and amortization. And then they added a couple of other smaller acquisitions compared to MoPub that also would have increased their amortization expense there, and that also helped compress their margins for a time. But I think one of the, if we look at the other side of things and see, okay, well, what was it that caused them to expand instead of compress? I think one of the major developments was Axon 2. So I talked

• 45:53Speaker 01

  about the AppLovin Ads Manager, and so over time, they've had new iterations, new generations of that software, and I think it has made some major, major differences just in their ability to just get there, get more and more advertisers to use their product just because it's gotten better and better. And so this, I think, probably is what really, really helped them increase it. So it was a mixture of the Axon 2 model, and then I think also, you know, they haven't done too much in M&A over the last few years. So I think that's also helped keep them lean. And obviously, you know, when you're doing a merger and acquisition with a larger company, you have to bring in new staff. Obviously, that adds expenses, and it can take some time to kind of figure out, okay, well, who are the people that you really need to stay in the company that are, you know, giving you the most bang

• 46:36Speaker 01

  for the buck versus who can probably be removed. And so that takes a little bit of time. So you have a little bit of a lag period as well.

• 46:42Speaker 02

  All right. Well, I think listeners can probably feel my hesitancy about AppLovin here, though you're definitely helping me appreciate the business much, much better. And really, I would say partly why I have a disposition to being somewhat critical is that we're trying to figure out why a business with a three-year revenue kegger of 55%, I mean, just eye-popping growth, is trading at a really very modest valuation compared to the amount of growth and profitability that the business has been able to flex. And so at face value, it just doesn't seem to make sense. But as you can probably gather from our analysis so far, there are a lot of moving parts in a business like AppLovin,

• 47:25Speaker 02

  and I do think that it's imperative to feel like you understand all of them if you want to be an owner of the business. But even if we strip out the growth from this business just for the sake of a thought experiment, there's still another metric here that is sort of unbelievable, literally. This is the business's return on invested capital that I'm referring to. And if you go to Fiscal AI, which is one of our favorite tools to use, their ROIC, return on invested capital, is listed at 113% for AppLovin. And that's actually a number that's been rising since the IPO. And yeah, it's another one of those that just sounds too good to be true.

• 48:03Speaker 01

  Yeah, and you know, I think there's some hair in this business, which is why I think it has a, I'm not going to say depressed multiple, but a reasonable multiple. And we'll address that here shortly, but I think I do want to look a little more at that astronomical return on invested capital number that you just mentioned, because when I saw it, it definitely caught my eye as well. So there's definitely a few things to consider here. So first, given that AppLovin is a software business, they don't necessarily have massive reinvestment opportunities. You know, this isn't Google can invest hundreds of billions of dollars into a new AI infrastructure. But you know, they've made some acquisitions in the past. And to be honest, that might be the best way for them to probably continue to deploy capital. But listen to this. So for the first half of 2026, AppLovin spent

• 48:47Speaker 01

  $1.8 million in property, plant and equipment on 3.8 billion in revenue. So you know, it just doesn't really seem like management is interested in hiring a lot of people. You know, the compu power that it does use is all rented. It's not owned. So there's no factories to build. There's no fiber to lay. And there's just not much working capital needed to run this business. It's your, you know, typical capital light business that is generating a ton of free cash flow with minimal reinvestment needed. But I think all this also poses kind of a problem that we've seen in a business that we just looked at recently, such as like a Domino's Pizza. So they also have triple figure returns on invested capital, but they run into the exact same issue of limited reinvestment opportunities. So even though AppLovin has that 100% plus ROIC, it's not to assume that you'll get anywhere

• 49:31Speaker 01

  close to that number of returns, because at a maximum, you know, AppLovin can probably reinvest somewhere around 500 million per year in incremental organic growth through things like R and D, compu power, engineering headcount, and maybe some other smaller internal initiatives. So, you know, even though that ROIC is high, and it's great to see that it is a high number, just because there's this kind of lack of reinvestment opportunities, it's kind of harder to call AppLovin a compounding engine. I mean, if we go back 10 years ago and looked at to where they've gotten now, I mean, it'd be clear that the answer is yes, it is. But now, I mean, it just gets really hard to see, okay, where are they going to reinvest? And what kind of returns are they going to get on those reinvestments?

• 50:07Speaker 02

  Well, that's kind of the double edged sword of software companies. If we've learned anything from this show and the companies we've researched, you know, the good ones out there, the best software businesses, they'll have these extraordinary returns on capital numbers. But because the businesses are so capital light, meaning, you know, there's only so many ways that they can deploy cash into growing their existing business, they just don't have a lot of obvious places to put that capital back to work. And basically, your ability to drive earnings growth and shareholder value and intrinsic value is, you know, the returns on capital that you generate, and then what percentage of your earnings that you're able to reinvest. And so if you earn really, really high returns,

• 50:51Speaker 02

  but you have essentially no investment opportunities, then the business can still have a very uninspiring top line and earnings growth. And so, on the other hand, you could look at the hyperscalers and say that these were businesses that were very much capital light. But now they're taking this perspective of saying, I don't care about free cash flow at this point in time. And they're just pumping money into alternate business lines like AI data centers. And we're seeing businesses like Alphabet, Amazon, Microsoft, Meta, and Oracle too, doing this at really an unprecedented scale. And no one knows how these bets will pay off yet, but it's a huge gamble. And effectively, the capital intensity profile

• 51:33Speaker 02

  of these major tech companies that were once, you know, thought of as being very asset light, thinking more of like Meta and Alphabet there, more so than Amazon, but still, the capital intensity profile of these businesses has changed dramatically, which is just to say, it takes a lot more money to sustain the business at their current operations each year than perhaps it otherwise would have in the past. And again, this is sort of the challenge that AppLovin has, or at least my perception is that they have, is that they can generate really high returns in capital when they find opportunities to do so. And the question is, can they continue to find opportunities in their core circle

• 52:14Speaker 02

  of competency? Or are they going to end up drifting into other areas of the market over time in pursuit of those same sort of returns, only to end up misallocating capital?

• 52:26Speaker 01

  Yeah. And, you know, it's a really good question about the data center angle. I mean, they use data. So theoretically, would it make sense for them to go that way? I don't know. But, you know, I think given the rockiness of AppLovin's share price lately, probably wouldn't be seen in such a good light if they were to kind of go in that direction. But, you know, I also think they have enough stuff on their plate as is. So going that route would probably act more as a distraction. And as we saw with the divestiture of the gaming studios, not sure that that would be something that they would actually want to take on. But the point that I want to make here, though, is that AppLovin, I think, scores pretty much as high as possible on the returns on invested capital. But obviously, when it comes to capital efficiency, that's not the only capital allocation decision that management has to make. There's also dividends and buybacks. We don't have to

• 53:11Speaker 01

  talk about dividends because they don't pay them, which I think makes complete sense. But I think where things get really interesting is on the buyback front.

• 53:18Speaker 02

  Yeah. And for listeners who are tuning into the show regularly, you're probably tired of hearing that both Kyle and I are not the biggest fans of dividends for tax purposes. We go into tangent about why exactly that is, but that probably won't change until we reach our retirement years, which are a ways away off for the both of us, I think. But for now, we want to focus on business models that can maximize their investments in themselves, usually through intelligent reinvestment opportunities or through buybacks.

• 53:48Speaker 01

  Yeah. And you might think it's kind of weird for a tech business with these startup like revenue growth numbers to be buying back shares. But to be honest, their buyback program has actually been incredibly value accretive for shareholders, at least in their earlier years. So we can kind of separate the buybacks into these two different time periods. The first period spanned from about 2022 until 2024. And that's when the buybacks created a ton, a ton of value. So during this period, AppLovin spent about $2.5 billion to retire about 70 million shares. They did this with an average price somewhere around $35. Now, the share price today, again, it's already had a 50% haircut, is around 3.14. So obviously, this was a huge, huge boost to shareholder value. Now, just looking at

• 54:30Speaker 01

  this first period, it's hard not to give Froggy and the management team an A plus for capital allocation. So in 2023 alone, they spent $1.4 billion, buying back about 41 million shares. And today, that stake is worth roughly $12.6 billion. But perhaps the best part of this buyback was that it also helped provide liquidity for one of their earlier investors without spooking the market. For instance, AppLovin bought a bunch of shares from KKR, one of its earlier investors. So that allowed them to bypass KKR putting those shares onto the open market. So AppLovin was able to take them out and prevented panic from that kind of increased selling pressure that can happen pretty regularly. And they even actually during this period leveraged up a bit on some of the buybacks during this period to help increase the number of shares that they could repurchase, which I actually

• 55:14Speaker 01

  think is a pretty intelligent use of debt.

• 55:16Speaker 03

  Let's take a quick break and hear from today's sponsors.

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• 57:42Speaker 01

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• 58:21Speaker 02

  I definitely have to give for O E and the app loving management team more broadly. I think a round of applause because yes, that is some really fine timing on, on the buybacks. And even though reliance on debt always raises concerns, given that this business generates a ton of cash, I mean, I can see why taking some debt out to really add rocket fuel to the buyback program could be a defensible decision. But you mentioned that there's a second part to the story. It doesn't sound nearly as good as the first.

• 58:47Speaker 01

  Yeah, that's correct. So by 2025, the stock had risen over 30 times since the start of the buyback program in 2022 at the stocks trough. But obviously they didn't bottom tick this by any means. But if you look at the chart since the beginning of 2025, well, the stock price is essentially round tripped, going all the way up over past $700, but back down to, you know, 314 today. What makes this kind of surprising though, is that during this time, revenues and free cash flow have been compounding well above 40%. But during this period, the buybacks continued. And as of now, the average price was about $425 versus again, today's price of a little over 300. So this is where things are getting a little dicey. You know, I think Buffett has said repeatedly that buying back shares makes sense only when your shares are undervalued. And if I had to guess, management probably still thinks their shares are undervalued.

• 59:32Speaker 01

  But I think we probably need a little more time to see how this specific buyback program works out. If we come back, let's say in two years and shares are trading at 600 plus, well, then these buybacks will also be very value accretive. And this could theoretically happen if the business thinks it could just grow the top line a 30% kegger. While this is definitely a step down from their historical growth rates, it's still a very high number for a business with a market cap of $100 billion. I will say though, that management, I think, has maybe been a little too willy nilly on its buyback timing. So in that first period, there were times when they were buying back shares at say 10 times EBD EBITDA, which is a very, very good price. But during the second period, they were going all the way up to 40 times. So, you know, I think that's a very large contrast in valuation there.

• 1:00:16Speaker 01

  And as an investor, you'd obviously much prefer that they keep that multiple as low as possible.

• 1:00:21Speaker 02

  Well, a good corollary of capital efficiency is debt since it can be used to improve your returns if used intelligently. And given the intelligent use of debt, it seems on the earlier buybacks, how about we take a closer look at Apple's debt situation? What's your assessment of that?

• 1:00:38Speaker 01

  Yeah, I think this is actually probably one of the biggest highlights of the business is basically like I mentioned, it doesn't really require much debt to either grow or run the business for that matter. So as of the latest quarter, they have about $3.5 billion of long-term debt, but they're also sitting comfortably on 3.1 billion in cash and cash equivalents, taking net debt to just $400 million. And the debt they have are these long-term notes with a very reasonable interest rate maturing in a series of tranches all the way out for, you know, call another 25 years. So there's no giant wall of maturities that are coming due anytime soon. Now you also got to put that up against what Apple it actually produces in cash flow. So just in the first half of 2026, they generate $2.1 billion in operating cash flow. So they could effectively just wipe out their net debt multiple times over with just a

• 1:01:23Speaker 01

  single half years worth of cash flow generation. So, you know, as far as I can tell, there's really no red flags coming from debt.

• 1:01:30Speaker 02

  Now, I think Apple is clearly a very conservatively financed company. And since the business is capital light and doesn't require much capital beyond what they're able to reinvest in themselves, I don't think I would see much use for debt and the debt that they currently have. So that does beg the question, why even have it? And I think the answer lies mainly in two areas. One that we covered already in buybacks, they bought back 2.2 billion in shares just last year alone. So shares get depressed like they currently are having some dry powder to deploy beyond your current cash and the balance sheet can be a smart move. And the other rationale for why that we haven't really touched on is for M and A purposes.

• 1:02:10Speaker 01

  Yeah, so if there's a business like Apple and they can acquire other businesses that also would have maybe some sort of capital efficiency numbers that are close to theirs at a current price, well, then yes, it makes complete sense to go out and acquire those businesses. So since 2021, they spent about $2.8 billion on M and A. So this is a company that has experience in M and A. So I mentioned earlier, their adjust segment. So this was a business that they basically bought completely outright. They also bought Mo Pub from Twitter, which I mentioned earlier, and then a CTV business whirl. Then in terms of creating the most value, that was probably Max. Max was basically bought a little earlier, so it doesn't actually count in that $2.8 billion spend. But the really important part was that Max was actually a tiny startup founded by one of Mo Pub's co-founders.

• 1:02:53Speaker 01

  So the Mo Pub acquisition essentially was just a way to help move some more talent back into Max. But I think the biggest business that Apple has tried to buy, which is probably the most interesting one is TikTok US. So I think this was a very interesting proposition and the fit probably made a lot of sense. You know, Apple could leverage Axon on TikTok's massive user platform. That would help drive even greater advertising returns. But obviously we know with TikTok, there was a ton of regulatory scrutiny here and it was actually very quietly removed from any further conversation from Apple's standpoint as it experienced a ton of other rival bids and didn't end up winning. So TikTok US eventually was purchased by this consortium of other investors that are unrelated.

• 1:03:36Speaker 02

  In any decent business class, you're going to have a lecture on the history of corporate M and A and learn that generally it has not been a good thing for shareholders. Most deals have destroyed value or at least not lived up to expectations. And so would it be fair to say that Apple's M and A history has been quite mixed in your perspective?

• 1:03:56Speaker 01

  I think that's pretty accurate. You know, Max was clearly a very good acquisition, but it's really impossible to actually even assess it as we don't know exactly how much value it's created for shareholders. But my assumption would be that it has been successful as it obviously opened the door for them having the ability to be a two-sided business and play both the supply side as well as the demand side. The studio investment doesn't look great at first glance. They sold it for about $400 million in cash, but were trained about a 20% stake in Triple Dot, the company that they ended up selling for. And in the last six months, their share of revenue from Triple Dot has fell 27% sequentially. So, you know, it's not a lot of data, but obviously that's not something you probably really want to see and something that mattered for M and A. And then one of their complete flops was a business called Humans, which was a developer

• 1:04:41Speaker 01

  of a flip-flop social shopping app. They have basically fully impaired this investment, but you know, it was also done for just $55 million. Well, this is obviously was a mistake. It's at least not an investment that would have put the company in jeopardy if things didn't work out, which obviously it's gone that route. So they've had their share, I guess, of home runs in Max and then a couple of other ones that didn't work out. But at least in the things that didn't work out, the bet sizing, if you will, was low enough where the business is still running as it normally would, whether it made that acquisition or if it didn't.

• 1:05:12Speaker 02

  Yeah, well, you mentioned fully impairing their investment. What that means in plain English is that they wrote down the value of that investment flip-flop. They wrote that down to zero. So that was obviously a swing and a miss, but I agree with what you said, you know, it's a small bet. And if a management team was honestly only doing successful M and A, I would probably think that they're not reinvesting into enough opportunities and they're probably being too conservative. So probably overall, my impression is that the company's capital allocation is pretty average at best. I mean, it's nothing terrible, but it's nothing to write home about either. It really would not be, you know, sometimes with the rare company, you'll find that just

• 1:05:54Speaker 02

  management's ability to allocate capital on top of, you know, sort of a sound underlying business can be a real reason to want to join in as a shareholder. In Apple's case, I don't think the capital allocation is a factor that would pull us into wanting to own the stock unless we felt that the underlying business was really, really strong. And so to keep moving here as we break apart Apple, and how about we spend some time speaking specifically about Adam Feroji, because he's clearly been the central figure at Apple. And with that, I assume you get some sort of key man risk. So how do you think about Feroji and his alignment with shareholder interests?

• 1:06:34Speaker 01

  Yeah, so insiders in total, in terms of interest for looking at that insiders in total own about 13% of their class A shares, but they also have their class B shares, which are held just by insiders to, you know, give them voting power. The class B shares that Adam owns gives them about a 62% voting rights. So, you know, with both those shares put together, Feroji himself has something like a 9% economic stake in the business, which I think is a pretty nice amount of insider ownership for a business, let alone one that's, you know, $100 billion in market cap. Then when we move to salaries, they all seem pretty interesting, actually, to be honest. They basically, if you look at all the execs, they all took a base salary of $400,000 and this number has actually never been raised or changed since the business IPO'd, which

• 1:07:18Speaker 01

  means that most of the comp package is in the form of equity, albeit with no performance incentive attached to it. So another wrinkle is that they have no annual incentive plan, which you can argue at least keeps them more focused on the long-term. But, you know, the 2023 proxy numbers make me feel definitely a little uneasy. So the summary compensation table shows that Feroji earned over 83 million for the year with the chief technical officer at about 67 million. But it is also very important to note that $83 million isn't actually cash that he pocketed. It's basically the grant date accounting value of a performance grant at that exact time, which, you know, could have technically been worth zero. The proxy set so outright with these amounts do not reflect compensation actually received. So the fact is actually kind of worse.

• 1:08:03Speaker 01

  What he actually ended up making was actually a far, far higher number than that $83 million.

• 1:08:09Speaker 02

  It seems like a lot of compensation for one year, but I think we also need to see why exactly he was paid that. Because if we look at the past few years, it does seem to be an outlier. So Firogi was paid an average total comp of $12 million in the past two years. So that spike in 2023 had to be part of a former incentive plan. Is that right?

• 1:08:30Speaker 01

  That's exactly it. So it basically had this performance based mega grant. Now, the details here are very interesting. So in March of 2023, the stock was ranging in kind of the mid teens area. And the company was obviously very much out of favor with the market, kind of like right now, but somehow even worse. The company shares had actually drawn down over 90%. Now, the board then decided they should give Firogi and AppLovin's CTO some performance units. So the way these were designed, they vested in about five equal tranches, but only if the stock hit certain milestones, which ranged between a 2X and 6X of the price that they were granted at over a five year window. But incredibly, the shares bounced back super, super fast over just the next year or so.

• 1:09:11Speaker 01

  And so those five tranches basically had been achieved over consecutive quarters, which is why you saw this gigantic windfall. So the shares issues combined were about 17 million for 5% dilution, which, you know, it's not the lowest number. But when you look at the long-term chart of their shares outstanding, it really was just a very, very small blip.

• 1:09:32Speaker 02

  Well, from what I can tell now, it does seem like they have no performance-based incentive management. And I tend to like performance-based incentives. And in a business that is clearly so focused on data, you would think that they have a ton of different metrics that could incentivize manage on beyond just the share price.

• 1:09:49Speaker 01

  Yeah, it's a bit of a head scratcher for me too, but management is, you know, they've created a ton of value. The other thing I don't like about the incentive structure is that the shares that are issued are actually done each year, then fully vest each quarter, then are restructured the following year. I kind of feel like a longer vesting period would be much better for long-term alignment. But, you know, at least the amounts are maxed out at a little over 12 million. So future dilution risk from those payments is very, very low, which I can appreciate. But, you know, to be honest, in terms of this incentive structure, I don't really like it. I'd probably give it something like a D. And that might seem overly punishing, but it's just not that inspiring to me. I'd much rather see a long-term incentive in place. I'd envision something like, you know, a margin target. Obviously they've done really well on that.

• 1:10:31Speaker 01

  Maybe some sort of target on capital efficiency and maybe a free cash flow target. I think that would be a really, really good plan. And I think the company is already well aware of those metrics. And I think it would make a lot of sense to use that to help align management and shareholders going forward.

• 1:10:46Speaker 02

  Well, I agree with you there. And again, just to keep us moving along here, I think you know, the types of risks that I like to try and think about much better. After having done a number of episodes together for these past few months, doing company breakdowns. And so I don't think you'll be surprised at all that I would want to dig into regulation here in some more detail. Because the more you discuss this business and the fact it is involved in things like software apps and is associated in some way with Alphabet and Meta. My question is whether there are regulations that pose some type of risk to this company.

• 1:11:22Speaker 01

  Yeah, and I think this is a business that's involved with a bunch of other massive businesses that are also highly regulated. And as I mentioned earlier, you know, when AppLovin was considering just finding a buyer, it ultimately became a deal that regulators had to get involved with due to this Chinese involvement. So, you know, there definitely is some risk associated with this business. So as of the latest quarter, they also resolved a year-long case with the SEC regarding its data collection practices. So the investigation was started because of, you guessed it, short seller reports alleging that AppLovin had violated its platform partner service agreements. So the reports were by Fuzzy Panda and Culpa Research. And so basically the short reports were regarding other businesses like Apple, Google and Meta. So the allegations were that they use unauthorized fingerprinting techniques to gather more data than they were actually permitted to collect.

• 1:12:08Speaker 01

  But as of the latest quarter, they said the inquiry was closed and that there was no recommended action.

• 1:12:13Speaker 02

  These kinds of cases can be scary, especially when they're put forth by aggressive short sellers. And I've heard a lot of stories over the years about short sellers who are ultimately wrong, but they are incentivized to be correct because they profit from the stock going down. And that can make them do all sorts of things in an ethical gray zone, honestly. But there must be a little bit more to the story of why shares are currently down almost 60% and down nearly 30% from their Q2 earnings on August 5th. Which when I looked at them, looked pretty decent at a high level, right? They had year-over-year increases in revenue of 53% and profits growing at 55%. And so on the face of it, it does seem hard to justify why a business could retreat that much in price

• 1:12:58Speaker 02

  after what was otherwise a fairly strong quarter.

• 1:13:01Speaker 01

  That's right. And to your point on short sellers, I actually think they have a pretty good place in the investing ecosystem. You know, they have a point of view that isn't consensus. And I think they also unfortunately may fabricate or sensationalize things at times, but they also uncover things that can end up hurting investors or their customers. So with all things said, you know, you kind of have to take what they say with a grain of salt and really dive into whether you agree with them or not. Or if you don't think you're capable of formulating an opinion, just because it would be too time consuming, then you can just take that as a good signal to skip the name. But back to your point on the price drop. So I kind of agree with you. You know, it seems pretty strange to me as well. And since AppLovin wasn't a watch this business, I just kind of had to dive headfirst into why this happened and see if I could make any sense of it.

• 1:13:43Speaker 01

  So I had a really, really good chat with an investor friend of mine who has been invested in this business for some time and made some really good returns. And he had some really, really good points on why he thought this business had dropped. So I don't know if there's any one specific reason why the shares have dropped so much. It's probably from a number of different things. So I see three very strong possibilities that I think probably put the market on high alert. So the first one was a revenue miss versus the consensus. The second one was that the Q3 guide going forward decelerated down just a couple percentages. And then the third one was that they actually guided down on their margins as well. So to be honest, you know, if I put myself into an AppLovin shareholders shoes, this would probably all put together scare me a little bit.

• 1:14:27Speaker 01

  You know, the revenue miss probably seems the least impactful to me. They missed projections by 20 million or 2%. So I place very, very little weight on that. But I mean, the decelerating growth and decelerating margins is definitely something that I could see spooking investors. You know, because you might think, okay, well, maybe this is a new normal and maybe they're going to continue to compress over the future. So while researching this business, there were a few other areas worth, I think, mentioning. The first was the opacity of their disclosures. It's very rare to see a technology company without an investor deck. While most investor decks, you know, I agree, probably tend to be some degree of over sensationalized nonsense. I also think that they can be quite helpful in just at least understanding a business at a very, very simple level. But AppLovin has no investor deck, which I found very strange.

• 1:15:10Speaker 02

  It is odd, and I like using investor decks to get a view on alignment with shareholders. And if an investor deck mentions adjusted EBITDA in every slide, there's a pretty good chance that when you look at the proxy, they're going to be incentivized on that figure.

• 1:15:24Speaker 01

  Yeah, I'm glad I'm not the only one with that conclusion. When I see an investor deck where they're mentioning figures like return on invested capital or return on equity, it always puts a smile on my face because I can assume and am usually correct that management is incentivized by that metric.

• 1:15:37Speaker 02

  Well, despite the opacity, what other risks do you see with this business?

• 1:15:42Speaker 01

  Yeah, I mean, it's probably my biggest apprehension. And that's just based on the fact that its core AppLovin is a good business because it has this kind of really, really good algorithm that requires constant improvement. But I don't know, there's just, there's just something I don't really like about that because it kind of feels to me like another business can just write a better algorithm and then poof, there goes your business model. And I think this is kind of part of the risk that ties right into AI risk, which is obviously a very, very hot topic in 2026. With how good developers are at using AI, who's to say that there's just not some other team of developers out there looking to compete with this company that can maybe better utilize AI and increase their output by 100 times or 1,000 times? At least with AppLovin, I realize it's not that simple because obviously they have this proprietary data set. So in reality, even if a competitor could create a better algorithm,

• 1:16:28Speaker 01

  because they can utilize AI maybe to a higher degree, the algo still probably wouldn't be as useful to them simply because they don't have the data set that AppLovin has already gathered here over the years. But, you know, I think I'll be transparent here and say, I think it's next to impossible for me to really understand the kind of model data question with any real conviction. So I think that kind of disqualifies me from having the most valid opinion on this exact subject. But looking at another risk I do have an opinion on, it's simply that a business with these ridiculous growth rates, capital efficiency and margin numbers, it's going to attract competition. I mean, yes, it has proprietary data, but you know, if another business wanted to go out there and build an algorithm, there's just not that much stopping them from doing so. And so the other thing is, you know, they already have a lot of competition.

• 1:17:10Speaker 01

  This is a really cutthroat business and there's really zero room to rest on your laurels. So, you know, I don't think AppLovin is doing that by any means, but it's nice to kind of have a business where the business is coming to you without having to just break your back, trying to find new business constantly, as well as fighting off very, very intelligent and well-financed competition.

• 1:17:27Speaker 02

  Yeah, that makes sense, but it feels like any business, any sort of technological edge today has to constantly be on its toes. At least when you're looking at a business like Google or Meta, they have the, the network effects of their platform to rely on. So you're not really betting exclusively on the strength of their algorithm. You sort of take it as implied fact that they have very good algorithms and they've proven that over decades now at this point. And instead you're betting on, like I said, these things like network effects, which feel like for investors like us, much more digestible bets to make than truly tech focused bets. And it's sort of like how they say, Apple is not really a tech company. It's a consumer hardware company.

• 1:18:11Speaker 02

  It's that same sort of mindset of with Google and Meta, it's sort of transcended just the algorithm, whereas with AppLovin, they really are, it seems more like a technology bet, where Google and Meta are basically more diversified business models. And that's what makes them such exceptional companies.

• 1:18:29Speaker 01

  Yeah. And I think that diversity is so key to it, right? Cause I think with them, do they rely on an algorithm to some degree? Yes. But if their algorithm maybe underperforms for a short period of time, they have so much diversity in other areas of the business, they're still going to be completely fine. Whereas with AppLovin, you know, something might happen with its algorithm over a quarter or whatever, and then you get something happening right now where the market ends up panicking. So while I will say that I think AppLovin definitely has some advantages, they're just nowhere close to as robust. If you're going to compare it to a company like Meta or Google, I think we can both completely agree on that. I think our listeners would agree too. So I just want to touch here on one more risk, which I think may have also been a major factor in the latest quarterly panic that we've seen.

• 1:19:10Speaker 01

  And this is that the business is potentially getting saturated in terms of generating volume. So as I mentioned a little bit earlier about their disclosures, it's kind of hard to get really meaningful data, but there are two valid data points that are useful. So we can get install volume and revenue. So we can see that in Q3 of 2024, a couple of years ago, install volume was plus 39%. So, you know, they were getting more and more volume there, but you know, as of this year, it's been negative in both quarters. So it appears that install volume is, you know, moving in the wrong direction. And just to be clear, we don't have any idea of knowing what the installed base actually is, as they don't disclose it, but they do tell us the volume of installations is going up or down on a quarterly basis. And I think that's really, really valid data to look at. So I think the fact that they're continuing to grow, but with a declining volume at least

• 1:19:54Speaker 01

  means that they're making more money from other areas of the business. You know, e-commerce has been something they've highlighted on their latest call as being another growth engine. This isn't a horrible problem to have, but if your volume continues to decrease, then you know, there might come a point where you can't solve it with just increasing pricing alone. So if we look at numbers from Tengen, which specializes in marketing analytics, they claim that AppLovin commands slightly less than about 40% of the iOS ad monetization and user acquisition revenue for mobile games. The max mediation platform powers about 55% of the top grossing games and over 73% of the top mobile games. So, you know, as you can tell, they already have penetrated this market quite a bit, which further explains why they are seeking to diversify and get customers in other verticals.

• 1:20:37Speaker 02

  I think on the one hand, they've clearly penetrated the market well, and that gives them hopefully a long runway to continue monetizing that market share. But then on the other hand, having a large market share can ironically be a challenge for the kind of reasons you just discussed, right? If they can't take any more market share, volumes will, will dry up to some extent, forcing them to try and find volume growth elsewhere. So with all that said, now that we've looked at a few of the risks that worry you the most about this business, let's look at just how they're going to continue growing it. Because compounding revenue by 50% year over year is no easy task. And that's sort of a high bar to set for yourself with investors.

• 1:21:16Speaker 01

  Yeah. And I think you're totally right. All the pros and cons of having that high market share. Part of the reason I think AppLovin grew so much was that they were taking volume by increasing their market share. But now they, like you already said, they have to look for other ways to grow. So while I think AppLovin is probably going to be a cash flowing machine for probably many years into the future, I think investors are clearly much more concerned with the growth aspect of AppLovin. So one way that they've diversified is by creating actually an entirely new social media app called Gist from complete scratch. So I don't think Adam Feroe intends for this to be the next Instagram or Tik Tok by any means. And frankly, he doesn't really need it to be in order to get what he wants from it. My guess is that Gist is something that he can use similar to how he owned those mobile game studios.

• 1:21:59Speaker 01

  So you just buy the end product that the users are actually using. You gather data from the platform, then you monetize that data to further improve their algorithm.

• 1:22:07Speaker 02

  Well, it makes sense. And since much of the development and R and D flows through their cost of goods sold, we don't know how much they've spent on creating Gist, but if it can help them eke out growth for a few more years by continuing to improve their matching abilities, then it seems like it'd be worth a fairly large investment.

• 1:22:25Speaker 01

  Yeah. And given that AppLovin isn't really a social media app business, I would have pretty low conviction that this scales up to be anything too big, but they did a fine job with the gaming studios and from what I've seen, Gist has been pretty well reviewed. It was a pretty interesting initiative because there wasn't some sort of ground announcement. You know, I actually found it through my friend who did some online sleuthing. It's a little odd that they wouldn't have discussed it, but I guess it's kind of echoing the ongoing theme of AppLovin's limited disclosures.

• 1:22:49Speaker 02

  It seems super speculative at this point, but I could see a world where they can somewhat scale Gist and get the data they want out of it. And that could add to their growth runways. But again, with how little information we have, it's just really hard to have a lot of conviction in that idea.

• 1:23:04Speaker 01

  Yeah, totally. Now, another growth lever for AppLovin is in e-commerce. So this has been a strong growth lever so far with that industry growing about 28% in the latest quarter over the holiday peak, despite it actually being a traditionally more weaker quarter. But you know, it also kind of creates another problem, which is like Gist, it's not directly in AppLovin's wheelhouse. So for instance, when AppLovin shows an ad in a mobile game, it tends to last, let's call it 15 to 30 seconds. But advertisers for let's say a small and medium sized e-commerce business, they tend to use static images or dynamic product catalogs as these are often built specifically for ads on Meta or Google. So, you know, with that said, it might take some time for them to optimize the ads in this segment for something specifically like a mobile game. You know, the format would need to change.

• 1:23:47Speaker 01

  And in order for this to be a viable market, that gap would be to eventually close. And so there's kind of this looming question, which is are small and medium sized businesses willing to change how they advertise? And if they think they can get a better return on ad spend using Axon, well, then they might go that way, but it still creates some friction on their end in producing ads that are optimized specifically for Macs and for mobile games.

• 1:24:07Speaker 02

  I think it's nice to see the business having multiple growth levers, but I know AppLovin is very much reliant on its Axon model. And if the model provides advertisers the best prices on ad spend, then of course they're going to prefer that over alternatives. But the other issue with that is that since they are constantly updating the algorithm, you can get periods where it will underperform, which according to management is sort of what it sounds like just happened in the latest quarter. So theoretically, if they ship an update right after Q2 and the model delivers a higher return on ad spending, they could see a meaningful uplift in their revenue numbers for the next quarter and beyond.

• 1:24:45Speaker 01

  Yeah, I think that's part of the business that you can probably perceive as being both a positive and a negative. It's a positive in that the algorithm is obviously creating a much more efficient product for their advertisers, but it's also negative because if the model falls behind a competitor or if the update cadence is off, well, then you get numbers like they had in the last one. So the other two growth drivers I'd like to mention here are the expansion of the supply side platform. So the three Feroe has mentioned are non-gaming apps, then you got the open web, and then you got connected TV. Right now, you know, this doesn't seem to be a huge priority and there hasn't really been a timeline given on it. So, you know, it's worth watching, but right now it seems to be a very, very low priority. And then, you know, there's the take rate. So I mentioned earlier that the price that advertisers pay isn't actually what the developer

• 1:25:29Speaker 01

  of the ad slot gets because AppLovin is getting a cut in between that number. So again, we don't know what the number is and it's worth being clear that we can't know it from the filings and I doubt we'll ever know it in the future unless you have some sort of insider information. So AppLovin books revenue as an agent, net of what it pays publishers. So the gross dollar never actually appears. There's no gross billing line, there's no publisher payout line, and the revenue breakdown is by geography only. So you can't even separate Macs from the actual ad platform. So again, the guess in that 30 to 40% range, it's a guess, but it's not something that I can actually source from AppLovin. Now, the one thing that management volunteered this quarter was that Max Marketplace grew double digits sequentially while AppLovin's own net revenue grew only 4.4%. So it's tempting to

• 1:26:14Speaker 01

  read that as AppLovin taking more, but it actually points the other way. So if publishers' dollars are growing faster than AppLovin's, AppLovin is actually capturing less of the pool. And I'd be cautious even about that because Max is a marketplace carrying Meta's demand, Google's demand, Unity's demand, along with AppLovin's own. So publisher earnings can definitely grow faster just because competitors are bidding harder into Max. And I'd say that's more of a competitive intensity signal rather than a take rate signal. So Froggy offered it as proof that the gaming category is healthy, and it may well be, but it really tells us nothing about the cut. So it'd be great to have more data on, but it's really hard to say, given their murky disclosures.

• 1:26:53Speaker 02

  Well, it's been a long one today, folks. And I think now is as good a time as ever to get to our estimate of AppLovin's intrinsic value. So I'll let you take it away, Cal.

• 1:27:02Speaker 01

  Yeah. So I'll start off by saying that AppLovin is a pretty interesting business. For a business to be growing as fast as it is and trading at a cheap price is very, very rare in the markets, but it happens sometimes. And if you find that the market is completely wrong on the business, well, then you can make a very, very tidy profit. So for my base case, I assume that the business continues to compound its revenue at a little bit below about 17%. This does mean that revenue continues to decelerate, which, as we've seen, the market does not like. And this is incredibly conservative as management has guided for about 47% growth in the short term. But I'm going out five years here, and I'm assuming that volume continues to go down in that e-commerce and just provide a very, very minor lift, if any. I assume that its EBITDA margin stopped expanding and stick around that kind of 77% range, which is a few

• 1:27:45Speaker 01

  percentage points below the last 12 months. The small fade comes from maybe compute making a larger portion of revenue and stock-based compensation as a percentage of revenue increasing slightly, as well as more competition for their Max product. And then finally, I'm just applying about a 13x EV to EBITDA multiple, which bakes in an additional rerating downwards as growth numbers continue to slow down. This is obviously a pretty big step down from its 19x that it's trading at now, but I think it's in line with kind of the bottoming of their multiples when shares were very much out of favor previously, which is an outcome that I believe to be pretty probable in the future. So with those assumptions and a 30% margin of safety, accounting for just the massive amount of volatility in this business, I get a price of about $480, which offers a 9% kegger. And by the way, if you want to play around with

• 1:28:30Speaker 01

  the model, you can find it linked in our show notes below. And you can also sign up to our free intrinsic value newsletter at theinvestorspodcast.com to get deeper dives into the companies that we cover on the podcast.

• 1:28:40Speaker 02

  And we'll have the link to sign up for the newsletter also in the show notes. But yeah, where does that leave you on the business today, Cal, in terms of an investment perspective? And whether we should add it to our intrinsic value portfolio?

• 1:28:51Speaker 01

  Yeah. My thoughts on this business are that it's a pass, if I'm putting it surely. I think while the business certainly offers a lot of upside, I think there's a path to achieving mid-teens return, or maybe even into the 20s under very conservative assumptions. But I just don't think I could find myself really ever getting comfortable enough with the business to ever have it in the intrinsic value portfolio or my personal account either. You know, there's some real hurdles for them to continue growing, and I've been burned by businesses with high growth rates that I assumed would slowly fade, only to see the growth rate halt to a complete standstill. And the multiple compression was incredibly painful. So, you know, it's just an experience I'd prefer to not have to repeat. And part of the reason that I made this mistake was probably in not fully understanding the business as well as I should have to make that

• 1:29:34Speaker 01

  investment in the first place. And I actually get a very similar feeling with this one as well. You know, if this business does well, it's one of those situations where I will definitely give a round of applause to shareholders. But I just have zero regrets being on the sidelines. I think there are other businesses that I've covered that just make so much more sense to me, and where the outcome in a few years' time is just much more visible to me. You know, businesses with a completely different business model to AppLovin, like a Lifco or Wise, they just seem like businesses to me where maybe they don't have the same upside as AppLovin, but the base case is just so much easier for me to understand, which is why they're in the intrinsic value portfolio and AppLovin isn't.

• 1:30:08Speaker 02

  Yeah, exactly. I just personally think this one is too hard for me. And smarter people than me may feel like they understand the nuances of the programmatic advertising industry to have a lot of conviction in buying into AppLovin after the recent sell-off. But we've mentioned Trade Desk a few times today, and it really has become our go-to example of why you should stay in your circle of competence, because several points along the way in the last year, I've had folks reach out and ask, why am I not buying shares in the company after a 40% decline and 50% decline and 60% decline? And it's just kept going on and on and on, and the stock has just kept falling. And to be completely honest, I don't really know why, because I never understood the business all that well in the first place. So is it a buying

• 1:30:50Speaker 02

  opportunity? Is it a value trap? I have no idea. And the great thing about investing is that you can choose which pitches to swing at, which is another thing we like to say frequently on this show. And for the Trade Desk and AppLovin, I'm very content with sitting on the sidelines. If this is the bottom in those stocks, then, oh, well, we'll get to watch as they rocket upward. But I won't have any FOMO. I only have FOMO when I miss an investment that I felt like I should have been able to understand. And in this case, I just don't feel that way at all. And Buffett and Munger famously missed Google, and they managed to still do pretty well. So you can afford to miss on a lot of big successes. A lot of stocks can do very well without meaning that you won't be able to do well. But what

• 1:31:32Speaker 02

  you can't do is you can't afford to make big mistakes on businesses that you don't understand.

• 1:31:37Speaker 01

  Exactly. And I think you'll continue to see us having our fair share of wins and losses on businesses that we don't even end up owning, you know, seeing as we are looking at so many businesses. So, you know, I think when it comes to modeling, we have to take into account not only price, but also just how comfortable we are with our understanding of the business. You know, I've heard some value investors say that there's no business that is ever just a no, because if it's cheap enough, well, then you can always find some way to justify owning it. But personally, I don't think I'm actually on board with that statement. If I lack the ability to understand the business well enough, unless I'm basically getting it for zero, then I'm just going to be making a mistake of omission, and I'm just going to take a pass. So that's all we have for you today. But as per usual, before we sign off, I like to leave you with a quote, this one by AppLovin CEO, Adam Froggy. "I

• 1:32:19Speaker 01

  never believed in saving for cash on any day. I feel like I'm a big believer in what we're building. I believe in where we're going. So if I believe in the future, and we're a really high cash generating business, we should always be buying back our shares." I think this is a great quote, and I think Adam has done a pretty good job with his buybacks so far. We'll have to check in over the next few years and see how the latest rounds of buybacks do. But if the business continues to grow, my guess is they will be seen in a good light as well. That's all for now, and I'll see you next time.

• 1:32:44Speaker 00

  Thanks for listening to TIP. Follow the Investors Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principal, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions

• 1:33:26Speaker 00

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