Is AppLovin a multi-bagger? 💰 | #4
Why I invested in AppLovin and why I love it.
AppLovin ($APP), is a mobile technology company primarily focused on ad tech and games - basically a marketing platform. I have been exposed to AppLovin via its mediation and Lion Studios - its game publishing branch.
Here is why I invested in AppLovin.
Overview
❤️ Investment thesis
🤝 Team
📊 Valuation
🐻 Risks and bear case
❤️ Investment thesis
The goal of developers is to reach as many relevant users as possible. The downloads are competitive. As a mediation and monetization platform, AppLovin helps those developers to reach relevant customers by displaying developers’ ads on customers’ devices.
The working of Applovin is explained in this video:
Its revenue is split almost equally between Businesses (help companies monetize and manage their apps) and Consumers (portfolio of games, both internal and external). AppLovin is a good business at a reasonable valuation as of today for the following reasons:
💪🏽 Strong numbers
As shown below, the cash flow of the company has increased by 63% in comparison to $222m in 2020. The cash flow grew to $369.1 million of which $35.3 million was net income. The company was running in a net loss of $126 million last year. So, that’s a huge positive for Applovin.
The confident management team promises to deliver 30%+ growth in cash flow as shown in the investor letter below.
We can expect more than 30%+ CAGR for the near future as their cash flow will be accelerated by the recent acquisitions of MoPub, Adjust, and Wurl and partnerships.
⛽️ Fueling growth
Applovin is fueling its growth using acquisitions and partnerships. The acquisition of MoPub and MAX has helped AppLovin to increase monthly active payers from 2.1 in Q4 2020 to 2.7 in Q4 2021, increasing monthly revenue generated from each unique device from $41 to $44 in 24 2022. The partnership with Trade Desk and acquisition of Wurl will likely increase the reach and revenue.
🌱 Growing segment
The mobile game industry, the primary target for Applovin, is expected to grow at a 12% CAGR up to 2026. Applovin has only captured 6% of the mobile-ad-network market. If it manages to hold or grow the market share, its revenue will increase by at least 12% CAGR to 2026.
🥇 First-party data
With IDFA, first-party data has been more important than ever. Luckily, Applovin has grown its portfolio of first-party games by acquiring and publishing over 200 games. This, although not significant for revenue directly, is an important factor for revenue growth for AppLovin. These first-party games give them enough first-party data that they can use to serve the right ad to the right user.
🤝 Team
The company was founded by three serial entrepreneurs - Adam Foroughi (CEO), Andrew Karam (VP of Product), and John Krystynak (CTO). The team is led by Adam, who is the CEO of the company and owns around 9.4% of the company, Andrew owns 7.2% and John owns 8.0% of Applovin. Although the co-founders don’t have experience in running a public board of directors consists of directors like Craig Billings (CEO, Wynn Resort), Margaret Georgiadis (CEO, Flagship Pioneering), Asha Sharma (CEO, Maplebear Inc), and Eduardo Vivas (CEO, Curated.com), who will be a great support for the team.
I am quite happy with the team and the board. I love the fact that the co-founders still hold over 25% of the company - that shows they have trust in the company.
📊 Valuation
Applovin has been trading at $41 as of April 26th, 2022. The market cap is at $16b with a P/S of a mere 5. Similar growth companies like Tesla and Unity are trading at 20 P/S. It has the potential of 4x growth based on it and I think $APP is in cheap valuation right now.
🐻 Risks and bear case
As a tech company in a competitive space as ad tech, there are a few risks associated with it, which are as follows:
🥉Not a market leader: Neither in the Business or Consumer segment Applovin is a market leader. A close competitor to them is Unity a business where Unity monetization comes up with the game engine and in the consumer segment, there are big players like Miniclip, Zynga, and Tencent.
💳 High debt: They have leveraged for the acquisition though, right now they are $3.3B in debt and the debt to equity ratio is at 1.51, which is bad compared to the likes of Unity and Digital Turbine at 0.75. Debt is scary when the company has a declining free cash flow and the company doesn’t envision any productive work with the debt. I think it’s not the case with Applovin, but high debt still remains a risk.
I think the bear case valuation of Applovin stands around $30-$40, trading at 5x earnings.
🤓 Conclusion
Yes, Applvoin is a potential multi-bagger but is in a competitive marketplace.
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Any suggestions how to buy it from Nepal ?