We Study Billionaires - The Investor’s Podcast Network - TIP843: AppLovin (APP): The 30-Bagger Down More Than Half w/ Kyle Grieve & Shawn O'Malley

Episode Date: September 3, 2026

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

You're listening to TIP. 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. 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 start. up is immensely profitable, yet it is one of the biggest losers year to date in the market with its share is falling over 50% in 2026. So App Lovin 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 and not owning this business at its current price? As a business with the numbers that App Loven 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. 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. 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 my money. 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 Greve. 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, App Lovin. 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, 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 App Loven. So as App Loven 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. 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 look incredible. And the stock kept going up and to the right. And now that's a company that has entered valued territories, 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 app-loven 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 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. 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, Into 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 App Loven 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. 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. 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? 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 Apple 11 scale, their growth advertising spend on App Loven is more than Pinterest, Snapchats, and Reddit's combined revenue. And naturally, the advertising spend on App Loven 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 App Loven 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 Majong. But now, Apploven is trying to diversify into other markets outside of that gaming vertical as well. So the two core products that App Loven offers brings publishers and advertisers together. App Loven acts as kind of an intermediary between the two, aiming to maximize the efficiency of ad spend from the advertisers' perspective, while offering the publisher the highest possible bid for its advertising slots on its own mobile games. So App Loven 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. It's really interesting product. But from my understanding, there is a really interesting backstory here, too, that I think we should share because it's pretty wild. It is, it is. So their founder and CEO, Adam Frogey, has quite the track record of success. So he successfully launched two other advertising tech companies, Life Street 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 App Lovin, 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. 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 App Lovin, the recommendation engine. 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 at Amazon, for instance,

focused on urgently 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. 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 Farogi first scoured the VC universe to find someone to help fund the company, but he actually didn't 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. Well, what were some of those mistakes he felt that he made by not having a board of directors assisting him? 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 App Lovin'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 growing super fast back then. that's going to be a common theme today. And it was about to hit about $50 million in EBIT. 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 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, he's 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 that it took. 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 a 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. 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 App Lovin 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 App Loven works. So at its core, App Loven is made up of four different segments. So one note to consider is that even though App Loven 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 Apploven 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. 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 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 Whirl, 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 App Loven also used to have their own apps business, but they ended up divesting that. We'll briefly touch on Adjust and World today. But just keep in mind the two most important parts of this business are definitely the App Loven Ads Manager and Max. Well, then how about we start with Axon, the Ads Manager. Take us through a real example of the role they would play. 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 Ad 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 spent. So let's say you spend $100 on advertising and you receive about $500 in gross revenue. Well, then your ROAS would be 500%. There's plenty of other

metrics, but I don't want to get too backlogged 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 Apploven discloses that substantially all of their 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. 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 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, 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. Great, great definition there. So Axon Ads Manager, I would say, kind of helps define their framework for their ad campaign. 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,

matching 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 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. 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 to 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 side. But as a company, Apple 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? App Loven 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? 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 App Loven's Mac 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 App Lovin 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. 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, Apple ovens number two, and meta's number three. So now let's say an ad slot opens up. Solitaire is saying 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 App Loven 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.

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 collect 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. And then they

win and end up paying $100 for the slot, but maybe Apple Oven 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. Yeah. And this is exactly the type of problem that App Loven'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 rose by about 20% in AB 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.

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 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 ex exchange over competitors.

And to try and put that a little more simply, Google controlled multiple layers 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 practice, including most controversially something known as the last look advantage amid pushback from publishers and regulators. But regulators in the court did ultimately conclude that its broader conduct still harmed competition.

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, Apploven to me isn't anywhere close to Anopoly, but we'll talk to Sean that a little bit later. But let's have a look at Appleabin's other two segments, which I haven't discussed much today and adjust and whirle. So adjust to me seems kind of of like an augment for their Axon product. You know, if advertisers want better insights into the customers that they're showing ads to, will 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. 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 App Love Inside. 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 thousand views. Let's take a quick break and hear from today's sponsors. For most of my 20s, my money story was simple. Earn more and the rest takes care of itself. My income

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S-C-R-I-B. That's S-C-R-I-B. All right, back to the show. And so for App Loven, 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 side. But is there, is there anything more to it? 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 App Lovin 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 use $100 spent by the advertiser.

the publisher is then getting $60 of that, while App Loven pockets the remaining $40. Now, the thing that I find interesting about App Loven is they theoretically could capture more of that spread over time without actually squeezing advertisers or the publishers. So if App Loven 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 App Lovin gets to keep a piece of that different.

And so that's kind of the flywheel of this business. And better matching creates more value, which lets App Loven 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. 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.

thousand 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 App Lovin's side of things. It's good to see that App Lovin seems to have protected itself well from that potential regulatory overhang that Google had to deal with. 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, Apploven seems to be in a pretty safe spot. But I think the real advantage for Appleloven is just how Axon ads manager interplays with Max. So Axon takes the advertisers'

budget and creative and figures out which publisher slots to put it in. And because it has a 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 App Lovin is doing everything right, advertisers are going to be more than willing to continue paying App Loven for more use of Axon, simply because the impressions they get are going to be much more valuable on App Loven versus an alternative since they just convert better.

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 app-loven? Yeah. So, you know, if I'm being honest, I think this is where App Loven 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 App Loven's product offering. And it makes sense from both an advertiser and publisher's perspective to use App Loven's products. But, you know, if App Loven can do this, well, what's stopping Google or meta or Unity from just replicating a strategy and why has an App Loven taken even more of a market share than it already has? So unfortunately, App Loven, they do have a number of competitors on both the advertising and publisher sides. So Google, for instance, is a competitor on both

sides of that competition as well. So Google has its Google AdMaw product. This product, just on the publisher side, also uses a bidding process. They offer analytics and they offer other automated tools. So the audience is learning quickly. This is why we decided to pass on the trade desk and why I still have an open 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 compounder 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 then 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 and narrative surrounding it. And so it's just really hard to get an advantage in the online advertising space because you do have these large tech behemists 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 a $250 billion market cap at one point for App Loven, 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. 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 App Loven 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 App Loven 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 App Loven is that a pretty brilliant job of understanding its customers, which I definitely think is key to its competitive advantage that it now has. Now, earlier, I mentioned that Apploven 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.

Frogey has actually said that he doesn't even like games. 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 App Loven to have. But I guess there's probably a good backstory here as to why they would have bought them in the first place. Yeah, there's definitely a good reason here. So they ended up buying these studios because in Apple Levin's earlier days, they needed to basically gather data from their publishers. Now, when Apple Levin 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 remember 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 App Lovin, 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 buys 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. I think it's pretty similar to the idea of like a strategic IP carve out. And folks who have listened to his 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 Kreme'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-haling app. It was something like a super app, maybe closer to a company. like Caspi and Kazakhstan. And so it included in other segments like grocery and fintech payments. And these segments were not only outside Uber's wheelhouse at the time, but we're 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. I just knew you'd fit Uber in there somehow. But I think that's a really, really good comparison. You know, App Lovin ended up selling these gaming studios. to triple dot in 2025 for a total value of about $800 million in cash in 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

unless 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 the relationship between these studios and Maxx while removing the need to deploy capital or time into the gaming industry. So since they got access to the SIDA, 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 Apple Lovins 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 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 App Lovin. 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 App Lovin 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 App Lovin, it would still probably take quite a bit of time for them to

reach the same level of scale that App Lovin has reached over this 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 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 app love and success. For instance, Lyftoff Mobile just went public in June of this year. And Legacy's Lyftoff 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 form. 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 rival is probably Unity's level play. 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 level play

and about 13% for ad mob. So, you know, they do have a pretty big. market share. 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. App 11 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 App Loven to shift its focus entirely toward advertising. And that divestiture reduced some of App Loven's vertical integration.

So it no longer operates the publishers whose inventory, its platform also monetizes. So at least structurally, App Loven 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 App Loven. Loven completely neutral. Its own advertising demand still competes inside of Max, but App Loven 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. 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, App Loven 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 add to surf. But Apple Lovin also participates on the demand side of those auctions as well. So in effect, it operates the marketplace while competing within it. Apple Lovin 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 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 Macs. I think the stronger question is probably whether Apple have and 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. It sounds like meta and Google are competitors in some ways, but they aren't apples to apples competitors for the reason. 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 App Lovin 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 is 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-like business.

There's 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. Yeah, the margin 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, Apploven has an average revenue per employee of $7.6 million.

And with profit margins of nearly 65%, profit per employee is also running into the multimilliones. Now, like most software companies, you can probably tell where much of this operating leverage is coming from. 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 Farage.

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 App Lovin. Chances are their unit economics are going to be much worse than App Loven's, which I think helps App Loven's competitive position to some degree. And just as we were looking at this chart here for Apple 11, 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? Yeah, so I think there's a couple of things that explain it. So the first one that would explain some of the 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 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 about the app love and 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 different. 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 giving you the most bang 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. All right. Well, I think listeners can probably feel my hesitancy about at 11 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

the 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 App Loven. 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 Apple of it. And that's actually a number that's been rising since the IPO. Yeah, it's another one of those that just sounds too good to be true. 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 investor 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 app loving is a software business, they don't necessarily have, massive reinvestment opportunities. You know, this isn't Google who 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, App Lovin spent $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 typical capitalite 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 investment capital, but they run into

the exact same issue of limited reinvestment opportunities. So even though Applovin has that 100% plus RIC, it's not to assume that you'll get anywhere close to that number in returns because at a maximum, you know, App Loving can probably reinvest somewhere around 500 million per year in incremental organic growth through things like R&D, Compu Power, Engineering, Headcount, and maybe some other smaller internal initiatives. So, you know, even though that RIC 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 App Lovin 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. 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-late, 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, 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 of these major tech companies that were once 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 businesses their current operations each year, then perhaps it otherwise would have in the past. And again, this is sort of the challenge that Atleven has, or at least my perception is that they have, is that they can generate really high returns and capital when they find opportunities to do so. And the question is, can they continue to find opportunities in their core circle 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. Yeah.

And 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 App Lovin'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 divesture 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 App Loven, 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 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. Yeah. And for listeners who are tuning into this 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. 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 creative 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 span from about 2022 until 2024. And that's when the buybacks created a ton of value. So during this period, Apple haven't 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 314. So obviously, this was a huge, huge boost to shareholder value.

Now, just looking at this first period, it's hard not to give Farogi 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. market. For instance, Apploven 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 Applevin 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 think is a pretty intelligent use of debt. Let's take a quick break and hear from today's sponsors. One part of being an investor that I don't think it's enough attention is how hard it can be to continue to improve as an investment researcher. And for myself, I often find that when I finish a great conversation with some industry expert or fund manager, my head is full of ideas. But by the time I sit down to write it all up, half of them are already gone. That's why I've been using Plod Note Pro.

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go to NetSuite. com, built for every industry, ready for every boardroom, netsuite. aI. slash TIP. All right, back to the show. I definitely have to give for a re-end. and the Apple of management team more broadly.

I think a round of applause because, yes, that is some really fine timing 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 of the story. It doesn't sound nearly as good as the first. 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 stock's 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 about 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 make sense only when your shares are undervalued. And if I had to guess,

management probably still thinks their shares are undervalued. 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 that say 10 times,

EBD, EBTA, 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. And as an investor, you'd obviously much prefer that they keep that multiple as low as possible. 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 App Loven's debt situation? What's your assessment of that? 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 trenches 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 App Povett 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 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. No, I think Apple Oven 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 on the balance sheet can be a smart move. And the other rationale for why that we haven't really touched on is for M&A purposes. Yeah. So if there's a business like Cap 11 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&A. So this is a company that has experience in M&A. So I mentioned earlier their adjust segment. So this was a business that they basically bought completely outright. They also bought MoPub 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 MoPub's co-founders. So the MoPub acquisition essentially was just a way to help move some more talent back into Max. But I think the biggest business that App Loved 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 Ovin 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 Apploven'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. In any decent business class, you're going to have a lecture on the history of corporate M&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 Applovin's M&A history has been quite mixed in your perspective?

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. 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 returned 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 in something that mattered for M&A. And then one of their complete flops was a business called Humans, which was a developer 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. While this 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. 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 bed. And if a management team was honestly only doing successful M&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 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 App Loven'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 App Loven, how about we spend some time speaking specifically about Adam Farogey because he's clearly been the central figure at App Loven? And with that, I assume you get some sort of key man risk. So how do you think about Farogey and his alignment with shareholder interests? Yeah, so insiders in total, in terms of interest, if we're 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 give them voting power.

The Class B shares at Adam owns gives them about 62% voting rights. So, you know, with both those shares put together, Froeke 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. 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, which 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 Frogey 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. What he actually ended up making was actually a far, far higher number than that $83 million. 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 Farage 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? 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 Farogi and Appleove and 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. 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. Well, from what I can tell now, it does seem like they have no performance-based incentive for 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'd have a ton of different metrics that could incentivize manage on beyond just the share price. 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 what the incentive structure is that the share. 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. 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.

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. 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 Apploven 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 Apploven had violated its plans. platform partner service agreements. So the reports were by Fuzzy Panda and Culper Research. And so basically the short reports were regarding other businesses like Apple, Google, and meta.

So the allegations were that they used unauthorized fingerprinting techniques to gather more data than they were actually permitted to collect. But as of the latest quarter, they said the inquiry was closed and that there was no recommended action. These kind 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. 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. 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 after what was otherwise a fairly strong quarter. 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 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. It seems pretty strange to me as well. And since App Lovin wasn't a watchless business, I just kind of had to dive head first into why this happened and see if I could make any sense of it. So I have 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 app-loven shareholder's shoes, this would probably all put together, scare me a little bit. You know, the revenue miss probably seems the least impactful to me. They miss 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 can 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 and just at least understanding a business at a very,

very simple level. But App Lovin has no investor deck, which I found very strange. It is odd. And I like using investor decks to get a view on alignment with shareholders. and if an investor deck mentions adjusted EBITA 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. 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 investment 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. Well, despite the opacity, what other risks do you see with this business? Yeah, I mean, it's probably my biggest apprehension, and that's just based on the fact that its core app loving 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 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 the 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 a thousand times. At least with App Loven, 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, 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 App Lovin 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. 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. This is a really cutthrow 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 businesses 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. 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 network effects of their platform to rely on it. not really betting exclusively on the strength of their algorithm. You sort of take it as an 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. It's that same sort of mindset of with Google and meta, it's sort of transcended just the algorithm. Whereas with App Lovin, 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. Yeah. And I think that diversity is so key to it, right? Because 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 App Lovin, 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 App Lovin 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 to. 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. 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 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

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 Apple Lov and command 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. 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 dry up to some extent forcing them to try and find volume growth elsewhere. So with all that said, now 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. 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 App Lovin 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 App Lovin 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 Apple Oven. 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 Farogey intends for this to be the next Instagram or TikTok 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 own those mobile game studios. 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. What makes sense? And since much of the development and R&D flows through their cost to get 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 or more years by continuing to improve their matching abilities, and it seems like it would

be worth a fairly large investment. Yeah, and given that Apploven isn't really a social media 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 what I've seen just has been pretty well reviewed. It was a pretty interesting initiative because there wasn't some sort of ground announcement. 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 App Loven's limited disclosures. It seems super speculative at this point, but I could see a world where they can somewhat scale

just 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. Yeah, totally. Now, another growth lever for App Lemon 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 just, it's not directly in Appleauvin's wheelhouse.

So for instance, when Appleuven shows an ad in a mobile game, it tends to last, let's call it 15 to 30 seconds. 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. 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 business is willing to change how they advertise? And if they think they can get a better return on ads 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. I think it's nice to see the business having multiple growth levers. But I know Apple Oven is very much reliant on its Axon model. And if the model provides advertisers the best prices on ad spend, 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 can see a meaningful uplift in their revenue numbers for the next quarter and beyond. 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 Farogey 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, 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 of the ad slot gets because Apploven 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 Apploven 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 or payout line and the revenue breakdown is by geography only. So you can't even separate Max 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 App Lovin.

Now, the one thing that management volunteered this quarter was that Max's Marketplace grew double digits sequentially, while App Loven's own net revenue grew only 4.4%. So it's tempting to read that as App Loving taking more, but it actually points the other way. So if publishers' dollars are growing fast than App Loven's, App Loven 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 App Loven'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 Farogey 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 would be great to have more data on, but it's really hard to say given their murky disclosures. 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

App Lovin's intrinsic value. So I'll let you take it away, Cal. Yeah. So I'll start off by saying that App Lovin 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 is 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 and that ecommerce and just provide a very, very minor lift, if any. I assume that it's EBITDA margin, stop expanding and stick around that kind of 77% range, which is a few percentage points below the last 12 months. months. A 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 13 times EV to EBTA multiple, which bakes in an additional re-rating downwards as growth numbers continue to slow down. This is obviously a pretty big step down from its 19 times 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 a model, you can find it linked in our show notes below. And you can also sign up to our free

intrinsic value newsletter at the investors podcast.com to get deeper dives into the companies that we cover on the podcast. 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. Yeah, my thoughts on this business are that it's a pass if I'm putting it shortly. 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 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 App Lovin like a Lyftco or Wise, they just seem like businesses to me where maybe they don't have the same upside as App Lovin, but the base case is just so much easier for me to understand, which is why they're in the intrinsic Valley portfolio and App Loven isn't. 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 and buying into app love and 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 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 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 App 11, 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 rock it 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 you can't do is you can't afford to make big mistakes on businesses that you don't understand. 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 a 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 Applob and CEO, Adam Froge. I never believed in saving for cash on or 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 buyback so far. We'll have to check in over the next few years and see how the latest rounds of buyback 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. Thanks for listening to TIP.

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