Lately there has been a lot of talk about AppLovin (APP). Is this another Trade Desk (TTD)?
The stock is down over 57% from its highs. The comparison with TTD is thus logical... let's take a look at whether it has lost its edge, or if this is just a temporary stumble.
APP recently reported results that at first glance look very good. Revenue grew 53% year-over-year to $1.92 billion, adjusted EBITDA rose 58% to $1.61 billion at an 84% margin, and the company also bought back $551 million of its own shares. Despite that, the stock plunged because revenue slightly missed analyst expectations.
The reason is that AppLovin hit obstacles in developing its ML models that power the Axon advertising system. These slowed the pace of ad performance improvement in this quarter. Simply put, the improvement the company expected did not make it into this quarter's results.
CEO Adam Foroughi (who by the way has huge credibility and has rarely disappointed in the past) explained that in R&D you cannot guarantee improvements every three months. According to management, the new improvements are already deployed and since the start of the next quarter they are delivering significant gains. (Developing neural networks is not an assembly line in a car factory; you cannot plan that every 90 days AI will miraculously jump 10% higher).
An important detail is that no existing customer cohorts reduced their spending. On the contrary, existing customer spending rose 28% YoY, which is an especially strong number given that this is the company's weakest seasonal quarter. Moreover, the SEC investigation was closed without any action.
AppLovin also publicly mentioned for the first time partnerships with data and analytics firms, through which it aims to acquire mid-size customers. These can bring additional data into the models needed for their improvement.
How to look at this?
If you believe that the pause in AI model improvements is just a temporary timing issue, as Adam Foroughi claims, the stock may currently be in a zone of significant undervaluation (my fair value comes out almost 50% above the current price).
However, one must realize that future growth depends to some extent on how quickly it can keep improving its models. If development slows down over the longer term, the investment story changes significantly.
Why do I think the market may be wrong?
The company has clear growth opportunities beyond gaming – open web (e.g., Shopify stores), connected TV through the Wurl acquisition, and soon its own product Gist, which is meant to compete with Pinterest. These are new ad inventory where the company can further expand both supply and demand for advertising.
And that is where I see the difference compared to Trade Desk. That one is actually losing market share in key segments like automotive and consumer, while according to the given source the competition does not feel a similar decline or macro pressure. AppLovin is not dealing with customer churn yet; it is only dealing with a temporary slowdown in the pace of development of its models.
How do you view AppLovin? Opportunity, or do you prefer to avoid it? 👇
