Stock Research - Applovin

Going to start this series as a way to keep track of the research I'll be doing and how my thought processes evolve over time.

Currently looking into Applovin - A Mobile tech company that makes its money by providing devs a platform and tools to market, monetise and conduct analytics on their apps

The revenue split as at end of 23 is 56.1% platform and 43.9% app-based, with app revenue (both advertising and In app purchases) falling consistently over the past 3 years.

This decrease has stemmed from a decrease in the price and volume of in-app purchases (12%,5%), and a significant decrease in price (45%) per advertising impression, despite an increase in volumes (39%)
(Next steps here to find out what is driving the crunch on margin and decrease in vol, look into subsidiary studios and published app activity - has there been a halt in publishing behaviours? Are the existing apps losing customer base due to age?)

software platform rev was up 76% YOY, (the K-10 states that this is mainly due to a 209M publisher bonus, but this only accounts for ~1/4 of the increase in rev). installations for AppDiscovery increased by 17% YOY and rev per installation increased by 35% compared to the prior year.

(Next steps here to look into why installations have been ripping, and why specifically rev has increased so much YOY, is it due to a change in fundamental product offering, competitive landscape, reg, or macroeconomic factors? Once factors are found figure out whether they're sustainable and over what time period)

While it looks like the percentage increases have slowed down, it's important to note that this is coming from a period of significant growth - i.e. while net installations have slowed the net revenue per installation is still increasing.

Since Dec 2021, the revenue from this segment has increased 186%
Total revenue has increased by 17.5%, while cost of revenue has decreased by 3%, and net income before taxes has increased 6x to 12%

• Stated that the decrease in GOGS was primarily due to amortisation and impairment of intangible assets from the sale of assets in the apps segment - implying that margins for the software platform segment haven't really changed, which doesn't make sense as the net cost of revenue have not significantly changed, while net revenues have ripped.
• Changes in other costs and expenses (excluding debt) have largely offset each other.

(Here, look more into the history around the strategic shift toward platform as a revenue driver and the cost-to-rev structure that the company is looking for, as well as any major upcoming expenses)




The key components for background here will be:

History

1. Who founded the company
   1. has management changed significantly over time
   2. how credible is current vs previous management
   3. is this a significant factor in the price of the equity i.e. will this affect growth / the multiple that the market is willing to pay
2. How has their business strategy evolved?
   1. What has and hasn't worked in the past, and why?

Core Business

1. What is their core business and how has it changed over time?
   1. seems like the answer here is that they pivoted from an app-based company to providing platform solutions for other developers.
2. Why did they pivot their core business and what is the rationale for the new strategy going forward?

Competitive Landscape

1. Who are the major competitors in the market?
2. what are the macroeconomic factors affecting the core business?
3. what does the market look like up and down the supply chain?
   1. i.e, find competitiveness of markets up and down the supply chain, price elasticity of demand and supply

Technicals

1. What is the multiple that the market is currently willing to pay?
2. What figure should be used to calculate multiple? i.e. EBITDA, P/E, Rev, Pure Profit, Growth?
3. What is the key factor here driving profitability?
   1. i.e. value per instillation? Number of installations? Product of both? (do they need to increase the value per installation concurrently with user growth, or can they run the Snapchat / Google model where user growth is paramount and the tap can be turned on after?) - likely to be determined by the barrier of switching and level of competition in vertical
   2. what is an accurate and reliable way of procuring the above information as close to real-time as possible?
4. What are some key numbers that need to be monitored to predict shocks to company/market performance? e.g. if margins are important, what do they depend on both the supply and demand side?
5. what are some key red flags in the company's financials? i.e. is there any indication that cashflow may break or their financing is unsustainable and will thus block potential growth?

is this long/short catalyst-based, or gradual over time?

Conclusion Day 1: Obtained a brief overview of the business and surface-level stats to get a blurry picture of stock. Further research required but crux of thesis likely dependent on value per customer and growth rate of customer base for AppDiscovery performance, with periphery contributions from other software in the ecosystem.

Instinctually the stock seems underpriced, but will conduct detailed analysis to determine.

Key stat here seems to be either margin or vol, (maybe both) but need to determine if company can affect margins (elasticity on demand and supply side) and growth potential for both vol and margin.

Price at time of writing:
86.43 USD