A sell-off has taken more than $30bn in market cap off of AppLovin in the past week, a notable slide for a momentum-y stock that was (very briefly) talked about in the same breath as the Magnificent Seven.
That raises the question of what, exactly, AppLovin is and what it does. Here are a few things we know:
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The firm was formerly backed by KKR, and was at one point a mobile-gaming company. This is perhaps the easiest-to-understand part of its business.
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It’s now focusing on advertising, after this month announcing plans to sell its mobile-gaming division for $900mn to a private acquirer.
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This advertising business involves serving pop-up ads to people who play mobile games. The ads themselves are for mobile games.
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It also threw some ecommerce advertising into the mix late last year, but didn’t report exactly how much.
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AppLovin was trading at 75 times next year’s earnings as of Feb 14, according to FactSet.
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Its advertising sales growth is indeed compelling. Its advertising revenue grew 75 per cent in 2024 from the year before, according to the company’s latest quarterly report.
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A bunch of short sellers are sceptical about the sustainability of that growth, and have recently published reports about it.
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The company is now trading at just 45 times next year’s earnings. The Nasdaq Composite is trading at a 27 multiple.
After this, things get a little dicey to parse.
One of the short reports, from Culper Research, takes issue with the legitimacy of the app downloads that help power its revenue.
Here are Culper’s claims, if we’re understanding correctly: AppLovin sponsors an “AppHub” on some phones’ operating systems. And on those phones, at least some of AppLovin’s clients’ games can “bind” to the “AppHub” to download other games on to their phones, with just one click and no additional confirmation.
For the people playing the games developed by Applovin’s customers, it’s easy to see why all of this could be a bit frustrating, if Culper is correct. The gameplayer is already forced to look at an advertisement and interrupt their semi-meditative tapping. And mobile games necessarily involve touching a screen, so if this is indeed happening, an unintentional tap could prompt an immediate app download. It’s not exactly unauthorised, per se, but it’s certainly a departure from what smartphone users have come to expect.
This could certainly be grouped with other less-than-ideal experiences for mobile gamers — except that the company does “performance advertising”, which means that it’s paid when someone downloads a game, or spends money in the game.
The company’s CEO responded to the short sellers’ notes with a statement that says the reports are “littered with inaccuracies”, and seeks to assure investors that all of its platforms, and the games it promotes, comply with App Store policies.
AppLovin also had a call with sell-side stock analysts on Wednesday, according to a note from Bank of America. In that call, the CEO assured analysts that the direct-download business was “never a major growth revenue driver,” the analysts wrote. They summarised his comments as saying “AppLovin’s [direct download] revenues are de minimis”.
BofA analyst Omar Dessouky told Alphaville that the direct-download business are distinct and totally separate from in-game downloads, and that competitors Digital Turbine and Unity have a big head-start on that business. As for the App Store policies, there seem to be enough complaints about other companies doing it that the practice isn’t being censured (this one, for example, seems to be about Digital Turbine).
That doesn’t necessarily mean one-click downloading can’t be used within games, however, which seems to be one of Culper’s main arguments. And despite its moat, Digital Turbine is trading at, uh . . . 9 times next year’s estimated earnings, according to FactSet. As we mentioned above, AppLovin is trading at 45 times.
Another question raised by the short reports is the company’s relationship with members of the “Mag 7”, and especially Meta (née Facebook). But those questions seem to really stem from this interesting Business Insider piece from December.
According to BI, industry executives and competitors — who may have an axe to grind, to be fair — have raised eyebrows at AppLovin’s ecommerce expansion. From BI:
AppLovin is only inviting ecommerce advertisers that spend upward of $20,000 a day on Meta ads to try its product, and it’s incentivizing some of those buyers with $10,000 ad credits, multiple industry insiders told BI . . .
In his chat with Alphaville, Bank of America’s Dessouky said Meta is the destination for about 80 per cent of ecommerce ad spending, so that’s an easy way to ensure these ecommerce clients will be worth the expense of onboarding.
[Jeremy Sonne, founder of AI marketing tech co Simbiant] said he’d seen an “extremely high correlation” between when AppLovin sees a spike in conversions and when Meta sees an increase in ad spend. He said he hadn’t seen a similar trend when comparing Meta and Google or AppLovin and Google.
He said that made him wonder if AppLovin was driving real incremental value or whether its campaigns were just reaching the exact same audience as Meta in some way.
He said he’d also seen a “concerning overlap” where Shopify sales purportedly driven by AppLovin have a very high geographic overlap with where Meta ad website traffic was coming from.
Now, this is all interesting, but it sort of dodges the fact that AppLovin’s biggest business has been advertising mobile games within other mobile games.
And it is odd to see just how popular it is on the sell-side for a company that — lest we forget — is mostly the marketing equivalent of a Matryoshka doll. Digital Turbine, for all of its supposed moat, is thinly covered by analysts. Dessouky downgraded it to “underperform” last November citing “increased competition”.
AppLovin, on the other hand, has 19 buy-equivalent ratings out of 27 analysts covering the stock, according to FactSet.
Are mobile games really that popular? Like . . . $109bn market cap that used to be $170bn popular?
The BI article raises another interesting point that probably isn’t related to its Wall Street popularity, but maybe could be related to its Wall Street popularity, given the Times We Live In. BI’s reporter closed out the story quoting some speculation about whether AppLovin could eventually acquire a social network — Snap was the example cited — to increase its reach to non-gaming customers.
AppLovin did just do a deal, though. Here are the terms, with its 4Q earnings report. With our emphasis:
On February 12, 2025, the Company announced that it had entered into a term sheet for the sale of the Company’s mobile gaming business to a privately held company (the “Acquirer”) for total consideration of $900 million (the “Term Sheet”). The Term Sheet provides for the total consideration to consist of $400 million in shares of the Acquirer’s common equity and $500 million in cash, subject to customary purchase price adjustments.
The Term Sheet also provides that the Acquirer will borrow up to $250 million of the cash portion of the total consideration and that, if the Acquirer is unable to obtain such financing, the Company agrees to provide financing in such amount to the Acquirer through the issuance of a promissory note. The Term Sheet is non-binding, except with respect to an agreement by the parties to use commercially reasonable best efforts in good faith to negotiate and finalize definitive agreements for the proposed transaction, a prohibition on the Company engaging in discussions or negotiations with any third party other than the Acquirer regarding the sale of the Company’s mobile gaming business for a specified period, and customary terms such as fees and expenses, governing law, and termination.
So if we’re understanding this correctly, out of that $900mn sale . . . $250mn will be funded with cash that the undisclosed acquiring company has on hand. Fair enough.
And sure, it seems fine that $400mn will be funded with equity (ie AppLovin taking an equity stake in the acquirer). But it seems like, in that case, it could be important to know what company it is. And if the acquirer can’t secure the financing to complete its purchase, AppLovin will provide that funding itself, by issuing the acquirer a promissory note. Interesting stuff.
But hey, JPMorgan’s fixed-income analysts say that investors should buy AppLovin’s bonds, citing the company’s introduction of a 2x leverage target in 3Q of last year. Since then it been upgraded to investment-grade status by S&P Ratings and Fitch. On top of its TK in outstanding paper, another $250mn won’t make a huge dent, right? Though presumably a giant Snap-style acquisition, if funded by cash/debt, would push its leverage up.
That sorts it out, right?? Any questions??
