Executive Summary
AppLovin (APP) was a boring mobile game company until it released AXON 2.0, an AI-powered ad engine. Since then, the stock has been a rocket ship. The thesis is that AppLovin has built the best prediction engine for mobile gaming ads in the world. By realizing that "the algorithm is the product," they have unlocked massive margin expansion and are now expanding beyond games into E-commerce.
1. AXON 2.0: The Algorithm
Most ad networks use simple logic (User likes Candy Crush -> Show Candy Crush ad).
- Predictive AI: AXON 2.0 uses proprietary transaction data to predict the Likely Transaction Value (LTV) of a user. It knows that "User A" will spend $50 in the next week, so it bids $40 for the ad. This arbitrage is almost risk-free profit.
- Self-Learning: The more ads it serves, the smarter AXON gets. It's a data flywheel.
2. Beyond Gaming (E-Commerce)
AppLovin is taking its gaming algorithm and pointing it at e-commerce.
- The Pilot: Early tests show that AXON works just as well for selling t-shirts as it does for selling mobile game coins.
- TAM Expansion: The mobile gaming ad market is $100B. The e-commerce ad market is $500B.
3. Capital Allocation
The management team is shareholder-friendly.
- Buybacks: They aggressively bought back stock when it was cheap.
- Cash Flow: The business is an incredible cash cow, converting nearly 50% of revenue into Free Cash Flow.
Risks to the Thesis
- Unity: Unity (U) is the arch-rival. They own the game engine (which AppLovin doesn't). If Unity gets its act together with IronSource, they could cut off AppLovin's supply.
- Apple IDFA: If Apple clamps down further on privacy (fingerprinting), AppLovin's signal could degrade.
- One-Trick Pony: The entire thesis rests on AXON 2.0 maintaining its "edge" over competitors. Algorithms have a short shelf life.
Conclusion
AppLovin is the "NVIDIA of AdTech." It is the purest play on AI improving ROAS (Return on Ad Spend).