TIP843: AppLovin (APP): The 30-Bagger Down More Than Half w/ Kyle Grieve & Shawn O'Malley

What It Covers

Kyle Grieve and Shawn O'Malley analyze AppLovin (APP), a mobile advertising technology company trading at a mid-teens EV/EBITDA multiple after falling over 50% in 2026, despite compounding revenue at 55% annually. They examine AppLovin's two-sided ad marketplace, competitive moat, capital allocation history, AI disruption risk, and whether the stock warrants inclusion in their intrinsic value portfolio.

Key Questions Answered

• •Two-Sided Marketplace Flywheel: AppLovin operates Axon Ads Manager on the demand side and Max on the supply side, capturing an estimated 30–40% spread between advertiser spend and publisher payouts. Better algorithmic matching attracts more advertisers willing to pay premium CPMs, which draws more publishers, generating richer data that further improves matching. Triple Dot's solitaire game reported a 20% revenue-per-daily-active-user lift after switching from waterfall to Max's real-time auction model.
• •Auction vs. Waterfall Monetization: The traditional waterfall method routes ad requests sequentially down a fixed priority list, leaving publishers with wasted impressions and underpriced slots. Max replaces this with a simultaneous real-time auction where every eligible bidder competes for every impression. Publishers receive the highest available bid rather than the first acceptable one, directly increasing yield. This structural improvement is the core reason Max commands roughly 55% penetration among top-grossing mobile games.
• •Strategic Data Acquisition via Studio Ownership: AppLovin purchased mobile gaming studios not because CEO Adam Faroge valued gaming, but to generate first-party behavioral data for training Axon and Max when the company lacked the scale of Meta's pixel ecosystem. Once the data flywheel was established, AppLovin divested the studios to Triple Dot for approximately $800 million in cash and equity in 2025, retaining a ~20% stake to preserve the publisher relationship without ongoing capital deployment into non-core assets.
• •Capital Allocation: Buyback Timing Matters: AppLovin repurchased roughly 70 million shares between 2022 and 2024 at an average price near $35, spending $2.5 billion. Those shares trade around $314 today, making that cohort worth approximately $12.6 billion — a clear value-creation event. However, buybacks continued into 2025 at prices approaching $425 per share, representing a 40x EV/EBITDA multiple versus the earlier 10x entry, illustrating how buyback discipline deteriorates when management loses price discipline during euphoric periods.
• •Extreme Capital Efficiency with Limited Reinvestment Runway: AppLovin's trailing twelve-month EBITDA margin exceeds 79%, return on invested capital sits above 113%, and revenue per employee reaches $7.6 million. However, capital expenditure for the first half of 2026 was only $1.8 million against $3.8 billion in revenue. This asset-light profile means reinvestment opportunities are structurally limited to roughly $500 million annually in R&D, compute, and headcount — constraining the compounding engine despite extraordinary unit economics.
• •AI and Algorithmic Disruption Risk: AppLovin's core competitive advantage rests on a proprietary matching algorithm trained on a decade of mobile gaming data. While this dataset creates a meaningful barrier — a competitor with a superior algorithm but no equivalent data would still underperform — the risk remains that AI-accelerated development could compress the time required for a well-funded entrant to close the gap. Liftoff Mobile, which went public in 2025 and operates both demand and supply-side platforms across gaming and non-gaming apps, represents a concrete example of this competitive pressure.
• •Valuation Framework for Decelerating Growth: Applying a conservative base case of 17% annual revenue growth over five years — well below management's near-term 47% guidance — with EBITDA margins stabilizing around 77% and a terminal 13x EV/EBITDA multiple (reflecting further re-rating as growth slows), the model produces an intrinsic value near $480 per share. Adding a 30% margin of safety to account for the business's high volatility yields a buy price around $336, representing a roughly 9% annualized return from current levels.