Soundtrack:

Table of Contents

• Hypothesis

• “Literature” Review

• Why Everyone Cares: Line Go Up

• What AppLovin Says About Itself

• Is It All About The Data & User Graph?

• Inventory is Imperative

• AppLovin Sells Its Soul

• AppLovin-Tok

• Candy Crushed Consumer Lifecycle

• Mobile Game Ads Are a Sewer

• Mind Th(re)e Gap(s)

Hypothesis

In the past few months, I have been asked about AppLovin more than I have ever been asked about any corporation over a similar time period. It seems people are interested in what’s actually going on with this oddly named company.

You can read a little of what I have already said, and a lot more great thinking from greater thinkers, in this edition of UnCharles.

The reason AppLovin confuses a lot of people is that one single, simple truth eludes them:

AppLovin is a gaming company for gamers. It’s for people who build games. It’s for people who game attribution. It’s for people who game the stock market.

Selling the games studio off didn’t change that one bit.

The lands beyond those where AppLovin has already succeeded, and where it must succeed next, are less of a Silly Fucking Little Game.

Spending time on arcane ad tech ecosystem engineering, so that you can more efficiently show deeply unwell people a rewarded ad where an unlicensed Peter Griffin throws up on a frog and the frog becomes an unlicensed Sydney Sweeney, and then they kiss and Faux Sydney’s hair falls out for some reason, just doesn’t get the same kind of results further towards the top of ad tech mountain.

This is not investment advice, nor legal advice.

“Literature” Review

The three most key positions on AppLovin at this time are well articulated in things other people have written and it’s table stakes to read and account for their ideas and work.

Ari Paparo has a great Marketecture post about it, especially if you’re interested in things they’ve done from an Ad Tech Head perspective. It’s the best, and most moderated (in a good way) piece I’ve seen on the whole scenario.

All the app growth guys have long been out in full defense mode and you can read about that to your heart’s content over on the MyDivorceDiary app, where they still congregate.

Finally, the document around which most recent AppLovin discourse orbits is a short seller report by MuddyWaters.

The report has some stuff that’s compelling, but some of it just reads like what every “performance” marketing network in history has done.

The AppLovin bulls point this out immediately when you bring it up; “welcome to performance advertising, is it your first day,” or something like that, is their refrain.

I think it’s worth noting that a defense that could have been used for Rocketfuel, SteelHouse (pre-MNTN), Criteo (pre-retail media), and too many smaller failures and frauds to mention is not something I would eagerly and glibly hang my hat on.

“Mobile advertising is the Superbowl of attribution scams and privacy violation all the way down so this is just how The Game works" is not a great response to these criticisms, and reinforces some of the key points I hope to make below.

Other than disagreeing that these concerns about AppLovin’s “performance” are easily dismissable, I don’t contend any points anyone else has made.

I just think people don’t understand the real problem with such a wildly high valuation for AppLovin.

I think most of the “bull” or “pro” points are valid…for a company with a much smaller valuation and “cultural significance” in ad tech.

Why Everyone Cares: Line Go Up

In case you live a life rich and joyous enough to have no idea why anyone is even talking about this, let’s catch you up, starting with why this all arguably matters.

The stock has been on fire for a long moment now, see: $APP ( ▲ 6.21% ) .

It’s not hard to understand why, on the surface.

AppLovin’s 2024 revenue jumped 43% year-over-year to $4.71 billion, after a couple years of flat-ish growth.

This seems as straightforward and normal as a hot stock can be: a software company (great margins) makes huge revenue gains, and in turn, makes huge stock gains. That’s basically the entire story of the S&P500, and American retail investor wealth growth, for the whole past decade.

Before we even move beyond the market data to analysis of the company and product, there’s already an interesting flag: AppLovin’s Price to Sales (P/S) ratio.

I’m both seasoned enough in stock stuff to know P/S isn’t anyone’s favorite metric, and not seasoned enough to know if it’s absolutely disqualifying for me to cite it, but there’s one thing I’m sure of:

AppLovin’s P/S of ~25 being twice as high as $TTD ( ▲ 0.07% ) ’s P/S of 13 is a great bridge into one of my core points, which is that The Trade Desk is actually the real benchmark for AppLovin, for reasons far beyond that just being the other large cap “independent ad tech” stock.

TTD is not a “lazy comp” just because it’s the other big ad tech ticker symbol; in fact, the lazy comps are the ones AppLovin desperately wants you to make: Google, Meta, TikTok, Amazon Ads, etc.

What AppLovin Says About Itself

Let’s be fair for a moment and at least acknowledge AppLovin’s own claims about this revenue growth.

I’m sure you will be shocked-SHOCKED!-to hear that “AI” is allegedly behind this meteoric rise.

AppLovin say that their greatest asset is their machine learning driven media optimization platform, which is called AXON 2. Apparently it’s a sequel, and kudos to them for naming it for a real part of the human neural system, I guess? They know what the parts of the brain are!

If their greatest asset is their AI ad optimization system, that’s great company to be in, right? Google, Meta, TikTok, etc.

Except that’s not true, and I don’t just mean for AppLovin. None of those companies’ greatest asset is their AI driven ad optimization system.

Before I reveal the real secret weapon every bazillion dollar digital ad platform is built on, if this article has already been interesting or maybe even useful for you, please consider subscribing so you don’t miss any of the great stuff to come:

Is It All About The Data & User Graph?

Is it their data? No, but we’re getting closer!

We can at least agree it’s much more their data than it is their ad optimization system, because without all that data, the system wouldn’t have anything to work with.

Doubt me? Let’s talk about it.

Lots of companies have made credible attempts to make serious ML driven ad optimization systems and gone absolutely nowhere, because they had no data that was both valuable and unique.

If this were really all about the best AI Stack Death Star, all those programmatic networks and DSPs that went all in on this would have succeeded, or at least ultimately mattered, in some way.

The third party data brokers would be insanely successful due to all these platforms with magical machines that could spin any data at all into gold, and so thirsted endlessly for their Rad Dads Who Resist Fads persona segments or whatever.

Oracle would have lived mostly on the success of its data related ad systems companies, not quietly shutting them down without even attempting to sell off any parts.

Is the secret to the megaplatforms’ success their identifiable user base they work so hard to build? Here’s where you’re going to go nuts, because again I say: no.

Being able to identify users across devices alone, and the addressability that comes with it, also is not the true key to being one of the largest companies in the world and not just another piddling ten-figure market cap penny ante pissant.

It’s the inventory these behemoths wholly created that makes them valuable. Full stop.

Inventory is Imperative

The enduring success of Google, Meta, and Amazon is often attributed to their data and user graphs, but this overlooks a critical component: comprehensive ownership of extremely valuable ad inventory, which is the key enabler of both those things, as well as has its own inherent value.

The power of Google's search data is maximized on its own Search Engine Results Page. “Search intent” data has been part of Google’s ad suite for years, and ask any advertiser or analyst how display or video inventory, or anything else you have ever been able to apply search intent data to, has ever performed. It hasn’t! YouTube’s growth only happened when it became perceived as a brand channel and abandoned the notion it was going to “perform like search” in anyway way.

Similarly, Meta's data is most potent within the Facebook and Instagram feeds; its off-platform Audience Network has famously underperformed. You may remember Meta’s lonely moment when they realized they had invented the first valuable mobile ad inventory and learned nobody else was even close to catching them, i.e. when they bought mobile video platform LiveRail to get their hands on more mobile video inventory, and then wrote it down to $0 from $500 million in no time at all.

Amazon’s ad platform sees stellar results on its own product pages, but that performance doesn't translate when its data is used across the open web, or a broad swathe of apps. Amazon saved their ad future without really knowing it a decade or so ago when they launched Prime Video, which at that point they thought was just going to be a stickiness play for Prime membership. It’s a good thing they made more of their own good inventory, because nobody else had enough for them!

Look at how Criteo crawled out of the stupid “retargeting ad network” attribution wars: by building out retail media sponsored search and product display ads so that it could fully control inventory for the first time. It’s the greatest ad tech pivot of all time, full stop, and it was pretty simple: grab land somewhere worthwhile (retailer websites) so you’re not dependent on building janky systems to dishonestly launder the worst open web inventory available as something with value.

AppLovin Sells Its Soul

AppLovin arrived at a crossroads, and unfortunately, there was a devil willing to sell them short term gains in exchange for their soul.

Specifically: in August 2023, AppLovin sold its portfolio of first-party game studios (Lion Studios) to Voodoo for a reported $425 million.

This move to divest from a games studio was framed as a way to focus on its core ad buying software platform, and the way the markets have treated companies that did this over the past couple of decades, who could blame them.

“Focusing on core competencies” is one of those business school siren songs that is irresistible to a certain set of executives because it’s narratively very straightforward: stop doing things you’re not good at so you can do things you are good at.

The thing is there are all sorts of problems with carrying this idea too far, which became more apparent than ever before when Boeing decided that making doors that stayed on airplanes while they were flying was not a core competency, leading to pretty predictable disasters.

I’m not even sure we learned our lesson from that, but we certainly hadn’t learned our lesson back in 2023, and AppLovin’s CEO directly said that they never really felt like they were a gaming company at heart, so divesting the games studio seemed like a “no brainer” to lots of people, I’m sure.

Now, this doesn’t mean that AppLovin entirely extracted themselves from ownership of and general power over inventory. Previous acquisitions like MoPub and other moves left them with plenty of inventory pie they could more or less exclusively price and slice if they so chose.

Here’s the thing, though. I think this inventory and platform ownership totality is so vital that they shouldn’t have been looking to offload their game studio. They should have been looking to acquire more gaming studios.

ActivisonBlizzard picked up King for $5.9 billion back in 2016, and in 2023 they themselves were acquired by Microsoft, and basically everybody agrees that this has been very bad for both parties and MSFT is grasping in the dark for ideas on how to turn this around.

I would not be shocked if King could be peeled off for something like that original $5.9 billion, which as you know by now is a number that would not be a shocking amount for AppLovin to spend. They already spent $1 billion to pick up decrepit MoPub, and I would argue King would be a steal by comparison.

AppLovin-Tok

As it stands, AppLovin are now mostly an inventory agnostic platform for buying other peoples’ space, more akin to TTD than Meta or Google. I would have run as fast as I could in the other direction and risked collapsing entirely for a shot at becoming a major owner of mobile inventory, and guess what?

AppLovin agree with me. That’s why they are saying they want in on the US spinoff of TikTok.

This is actually tragically silly and very smart. It may even be a tell that AppLovin knows its own greatest weakness.

It’s tragically silly because it wouldn’t happen in a sane world. I was going to type that it wouldn’t happen, but then I remembered who we have managing this US spinoff, if it ever happens.

Speaking of sanity, get more violently sane takes in a world otherwise rapidly succumbing to delusion by subscribing to this newsletter:

Candy Crushed Consumer Lifecycle

Mobile gaming is an incredible business. You could maybe even convince me it’s the best business ever invented, and will swallow everything.

Years ago, then-Machine Zone CEO Gabe Leydon delivered this controversial heater of a keynote in which he said one of my favorite things anyone has ever said about mobile apps:

“Mobile gaming is the most frictionless business the world has ever seen…you can’t sell water (as) efficiently, and you need water to live.”

I think this is true, and important, and it leads me to a point I make a lot to ad people who bow down before any gods that made their name in the app realm: it’s a much better business than the one you’re probably in, in terms of customer acquisition, and so you need to be really careful what lessons you take away from that sector.

Everyone is entranced by how data driven mobile app install ads got, and how early they got there compared to everything else. It’s true they were the vanguard of many things in digital marketing for a while.

This is why you see AppLovin and their boosters say things like “nothing is more competitive than mobile app install, and that’s where they cut their teeth” as a touted advantage. It’s basically the Sardaukar argument: they grew up in the most ruthless environment, and so compared to everyone else, they’re the toughest!

Well, hold on a moment. Let’s put it another way:

They grew up selling the most frictionless product the world has ever seen. The purchase cycle is measured in seconds, the user goes from not even knowing the thing existed, to having the thing, effortlessly, before the dopamine rush from the idea of having a new thing has ever worn off.

They grew up advertising the product with the most advanced data driven product development and high speed monetization optimization ever seen.

Given all that…it’s almost as if…ads themselves and their buying and optimization…are an afterthought? The wagging tail of a highly advanced dog?

Let’s explore this idea through an obvious lens that most people mysteriously ignore: the actual advertisements themselves.

Mobile Game Ads Are a Sewer

If you need convincing that holding mobile gaming up as the apex of advertising is problematic, than you somehow have missed seeing two things:

1. Mobile game ads.

2. The extensive conversation in general culture about how mobile game ads have not only become very bad, but so shocking and strange that someone with a normal brain looking at that can’t even comprehend how they would cause anyone to download something.

Here’s a nice little overview from 3 years ago; its points have only become more valid since then. You may really struggle to get through the video, which only sharpens my point here.

This is before we even get to another major issue, which is playable ads that are nothing like the actual game, or are even ads for games that fundamentally do not exist:

There’s a larger conversation here and a whole other blog post I could write, but here’s what is important:

This is the sewer of the ad world, and AppLovin are like the urban legend of the alligator that got flushed down and a toilet and became a 30 foot long monster that rules the underground.

Mind Th(re)e Gap(s)

Now that we’ve talked about AppLovin’s acumen in the world of mobile game ads and what that LITERALLY LOOKS LIKE, let’s talk about where they go next and if they’ll make it.

The next play is e-commerce but there’s actually a leap we need to talk about before that-a leap that you might assume AppLovin have already made: moving from mobile gaming ad powerhouse to general mobile app install powerhouse.

So really, we need to talk about three gaps, of three sizes, when it comes to being an effective ad platform.

1. The gap between mobile gaming and the rest of the mobile app world.

2. The gap between mobile app install and e-commerce.

3. The gap between e-commerce and advertising basically anything else, be it retail-centric CPG or SaaS or real estate or life insurance or whatever.

Singular makes a truly great global mobile advertising report. You should check it out.

One of the great things about it is that at almost every turn, it allows you to separate mobile gaming app advertising data out of the mix. This is extremely important.

Anyway, here’s a snapshot of their 2024 ROI leaders, for all mobile app install advertising on the iOs platform:

Okay, sure, but let’s see what happens when you segment games out of the mix:

AppLovin slides out of the top 5. Well, surely at least they still do well on Android, the janky land of awful ads and spurious privacy?

Once you filter gaming out on the Android side, AppLovin slides down past…Snapchat?

Snapchat, as in the ad platform that many performance advertisers consider to be the poster child for a channel that can briefly appear valuable for performance purposes, but peters out over time?

Not only is AppLovin not yet a giant in advertising outside of app downloads-Singular’s numbers suggest to me that it’s actually having a sweaty battle with the major social media platforms, and Google, within the realm of non-game app advertising.

In Part Two, I’ll look at how I think AppLovin will fare trying to conquer the world of e-commerce, and things beyond.