AppLovin (AL) Analysis: Response to Muddy Waters Short Report and Interim Thoughts

This is a condensed analysis. A comprehensive note with detailed figures will follow shortly.

Key Allegations Assessment

Fingerprinting Allegations

• AppLovin is likely fingerprinting, but this practice is industry-standard
• The MW report misidentified several fingerprinting techniques and contains errors:
  • Mixed web and app-based code analysis
  • Several findings couldn't be replicated
  • "IG id" likely refers to interest group ID, not Instagram (verified through testing)
  • "TTD" likely refers to The Trade Desk, not TikTok

Churn Rates

• Zero churn was never realistic; the market couldn't have priced this in
• More important is understanding net growth sustainability
• 20% churn with no growth presents a fundamentally different scenario than 20% churn with 100% YoY growth

Incrementality Claims

• The market never priced in 100% incrementality
• Incrementality could remain high given gaming audience exposure primarily to mobile game ads
• It's unrealistic to believe AL's core demographic (middle-aged females) haven't been exposed to these advertisers elsewhere
• Incrementality will naturally decrease as initial new supply is exhausted

"Black Edge" on Advertising

• Evidence on page 31 lacks conviction
• Similar ML systems with identical parameters would likely arrive at similar price points
• Without understanding the specific ML optimisation targets, similar bidding outcomes seem plausible

Attribution Claims

• If data collection is legitimate, targeting high-value users is simply good business practice
• AL shouldn't have access to information unavailable to competitors
• Attribution to the converting platform makes business sense, especially with enhanced engagement

Market Outlook

The share price drop appears momentum-driven rather than fundamental. Major analysts have maintained buy recommendations, with tracking data indicating solid e-commerce progression.
However, AL trades as a growth company with high forward EBITDA/EV multiples (~28.6x at current price of $264.97, compared to Meta's ~16.5x).
The volatility observed in pre-market trading (up 9% before being hit by sell orders) reflects this premium valuation in an uncertain macro environment, giving AL an estimated beta of ~3x.
Recent consumer spending data and LULU's Q1 results signal slowing American consumer activity. When macroeconomic conditions deteriorate, AL's revenue typically moves in line with larger players (Meta, Google), as evidenced by its 3% decline in Q3 2022 and delayed Q4 recovery.

Forward Scenarios

• AL beats Q1 revenue/EBITDA but issues soft guidance:Stock likely to fall 20-35% as growth narrative weakens
• Forward EBITDA revisions and multiple compression
• AL beats Q1 and provides optimistic Q2 guidance:Initial 20-30% stock appreciation
• If Q2 misses: 50% decline within a week
• If Q2 beats but with soft forward guidance: 30% decline within a week
• AL misses Q1 (considered unlikely):50%+ stock decline

Conclusion

I maintain a bullish short-term outlook with a bearish medium-term outlook. If forward EBITDA/EV multiples reach ~10x, this could present a buying opportunity depending on conditions at that time. If AL releases a beat Q1 and strong earnings guide for Q2, a proportionate put position may be appropriate.
Current price: $264.97
Full analysis with detailed figures to follow.