the applovin thesis goes WAY deeper than you realize

0:00 You know, it's not often that I ask you to watch a video in its entirety, but whenever I do, it is for your own good. It's because there's a massive amount of value in this video. If you've been curious about AppLovin, you've been looking at it from the sidelines, maybe you are an investor in it, maybe you just want to learn more about the company. Whatever the case is, today's video will teach you a little bit more about AppLovin, how the business works, how they monetize, and most importantly, how they have a massive asymmetric opportunity in terms of being able to grow their revenues tenfold.

0:26 No, literally, tenfold. There's a lot of context that we do in the first half of the video, the final third, call it, gets good. I promise you it's worth it if you stick around. Enjoy. Welcome back. My name is Aryan. I don't waste your time, so let's get straight into it. Ladies and gentlemen, in today's video, we are going to be talking about AppLovin. The reason why we're talking about AppLovin is because I would argue it is one of the most misunderstood large-cap companies that's out there.

0:47 There's a huge number of investors that look at the stock and they have a base level of understanding of they're an advertiser, they primarily monetize through mobile games, and that's about it. And so, in today's video, I kind of wanted to help explain two different things that I think there's a huge misconception with AppLovin. First and foremost, the first thing that we're going to really spend a lot of time getting everybody on the same page is how does AppLovin actually make money?

1:07 Yes, they primarily serve advertisers for the gaming vector, and they've recently gotten into e-commerce, but how exactly does the mechanics of that work for a company like AppLovin? And that's really important to understand because in the second part of the video, we're going to be talking about essentially why they're able to have such disgusting operating margins of 80%. As an investor, you should be happy if a company has 80% gross margins, never mind operating margins after they pay their employees stock-based compensation, all that sort of stuff.

1:32 And so, without further ado, let us get into it. So, the first thing that I kind of want to highlight with AppLovin, this is directly from their blog. This is when they went to general release in June of 2026. This is directly from the CEO. He has an interview with a whole bunch of stuff in terms of all the different updates, and so on and so forth. And he very simply just laid out the various different ways that AppLovin charges on the platform. There are three ways to buy on the platform today.

1:53 Return on ad spend, advertisers who focus on revenue goals like games and online shops Set a return on ad spend target and the platform maximizes the return as they scale spend. This is very simple. It essentially says that Apple 11, based off all the data that you have, I want you to optimize for me that for every dollar that I put in, I will receive $3 back in terms of whatever their goal is, right? If you're an e-commerce platform, you're selling a t-shirt, for every dollar of advertising that I put in, I want $3 of revenue in return and do not advertise for me unless it meets that hurdle rate. Now, that doesn't mean that that will necessarily maximize the amount of ad spend that you could possibly throw at it, but what it does is that it maximizes the return on ad spend.

2:29 There's the cost per purchaser. So, an advertiser who wants to maximize the number of purchasers, like ride-share, subscription brands, and prediction markets, buy at a target cost per purchaser. So, essentially, you just say that I'm not willing to spend more than $5 per installation of my Uber application, for example, right? And so, Apple 11 on the back end with all the data that they have, they do not advertise unless they're able to meet that hurdle rate of $5 per installation.

2:50 And then, the third one that I don't understand the best, but nonetheless it's still here, buying leads. Leads is the newest way to buy on our platform. Advertisers set a value per lead and Apple 11 delivers leads at a cost below that value. We built this for categories like auto insurance, health insurance, and home services. So, essentially, for these sort of like quote-unquote heavy-duty, if you will, higher ticket sort of things, maybe it requires a bit longer of a sales cycle, whatever the case is, maybe with auto insurance somebody could click on the website and then at a later date call in and then that's when they buy the policy. So, it's it's a bit difficult to track whether or not Apple 11 actually drove that sale. And so, the idea here is that you essentially just buy leads.

3:23 You essentially buy clicks. If somebody clicked over to the website and was maybe on there for a certain amount of time, Apple 11 is able to charge for that. The point that I really want to emphasize here though, if you look across the board on every single one of the methods in which that Apple 11 or you can advertise on Apple 11, they're all centered around essentially an event, essentially an outcome. You are spending at $5 per installation of your application. You are spending to achieve a return on investment of minimum three times on every dollar that you put in.

3:51 You're spending for somebody to visit your website. This is a little bit different than how traditional sort of like meta advertising works. Now, I understand that meta also does this sort of advertising. Those are options on the meta platform. There's no difference on that side. But, the point I'm trying to make is that like traditional advertising, you essentially pay for impressions and you're just hoping that those impressions convert. And they convert at a high enough rate that you have a profitable return on investment and that you're able to have a low enough cost per installation or cost per whatever your outcome is that you're solving for that the math works out for you. Now, granted, meta and both Google, they have like rolled out these various other types of return on ad spend and and cost per purchaser. But, what makes Apple 11 differentiated and why it is more powerful, why you can have lower cost per installation on Apple 11 as opposed to a meta, which by the way we have numbers for. I understand it is very anecdotal with what Nick put out earlier today in a tweet. But, even if you look across the board, even if you look at different interviews and and whatnot, if you look on forums, Apple 11 historically has had significantly lower cost per installation than any other platform. And mind you, by the way, like meta, Google, these two companies have buttloads more data than Apple 11. So, why is it that Apple 11 is the one with a significantly lower cost per installation? I would argue part of it has to do with the fact that Apple 11's ads are inherently longer-form. And so, naturally, when a viewer kind of comes across one of those ads, they have to have more undivided attention. It's usually when you're playing a mobile game and there's a 30- to 60-second ad that comes up. In many cases, it's of another game and you're playing like a trial of the other game. And so, if you end up liking that game, you'll probably download it. Whatever the case is, right? So, I think that is probably a significant portion of it. And then on top of that, I would argue that Apple 11 has higher-quality behavioral data over somebody like a meta. If you recall in 2020, Apple actually did the privacy changes that resulted in advertising companies, for example, a meta to not be able to track users across third-party websites. And that absolutely hurt their customer impression that they would be able to deliver to advertisers. In fact, Mark Zuckerberg has actually came out and said that the revenues would be double if it weren't for those privacy changes by Apple. And so, the reason why AppLovin is uniquely positioned here is because they also own their max ad mediation platform. And so essentially, not only is AppLovin a place for advertisers to come on and and be able to advertise inside of mobile games, those same exact mobile games are in most cases using AppLovin to essentially sell that advertising slot to a potential advertiser. It's essentially a network effect. There is the games that are selling ad slots, and then at the same time there's advertisers that are buying those ad slots, and so AppLovin is actually able to service both these parties. And it's because they have the relationship with the games and they're able to sell the ad slots of those games, they're able to pick up on a lot more behavioral data, deep engagement patterns. For example, how long a user plays, when they purchase different items, how often do they opt in to watch a trailer to get a second life inside of the game. All this sort of data they have, and it's because of that that they're able to have much lower cost per install because they can essentially better predict when a user might turn off of an app, so we should serve them a different ad for a different game, and then all that sort of stuff, right? I know I just threw a lot of information at you, so just a very super quick recap. There's essentially three different models of advertising on AppLovin. The big point, the big takeaway that you should have with this is that everything is event-based.

6:53 Everything is based around a potential lead, a potential installation, a potential return on ad spend target. And the reason why AppLovin historically is much lower cost per install than any other advertiser is because they have boatloads of behavioral data because they service both the game and the advertiser who's placing an ad inside of that game. With that being said, the second component to the video and why when you look on a platform like Fiscal AI and when you're looking at the margins of a company like AppLovin, it's sitting at 78%, which again, I really want to emphasize just how ridiculous that is. And it's not like this company is, you know, not is kind of like lacking in the growth department. They are growing their revenues a quarterly basis at 53%. Granted, it is slowing down more recently, but it's still an absurd level of growth, especially for just how profitable the business is. But that's an absurd amount of growth, especially for just how profitable they are, and more recently how cheap the valuation is. By the way, while I'm doing this, I think it's a great time to mention that the platform in front of you here is called Fiscal AI and there's a link for it in the description down below if you'd like to try it out with a 7-day free trial. Speaking of that valuation by the way, it is now trading and I I genuinely cannot believe this.

7:51 It is trading at 24 times earning and I just showed you that their revenue growth was at 55 54% and essentially all of that is flowing down to earnings. If not, there should be a little bit of operating leverage left with the business in terms of net margins. Those margins should slowly creep up over time. They've definitely exhausted most of their operating leverage. And so on an earnings basis, you have a company that at least on a trailing basis is growing at roughly 56% earnings growth and yet trades at 24 times earnings. So I'm giving you that backdrop before I tell you that this trend is not slowing down. And there is a disgusting amount of optionality with this business and a huge amount of opportunity for them to actually accelerate their revenue growth from this point on hinging on a couple different things. And so we'll kind of get into it. Now, Nick, unfortunately in this thread, he uses revenue and profits. What he should have done is say gross revenue and net revenue. And so essentially what I'm talking about there is like obviously AppLovin keeps every dollar of spend that is on their platform. Actually, it's estimated they don't break it out and for competitive reasons they don't break it out, but it's estimated that AppLovin keeps roughly about 20 to 30%.

8:50 Now it's tiered differently in different advertisers, whole bunch of stuff, but on average roughly 20 to 30%. And so again, there's a gross revenue. So for example, let's just say there's a Let's just say the average installation on the AppLovin platform costs $13 to get one install. Not the case, but anyways, let's just say it costs $13 to get one install of any application. That would mean that AppLovin has roughly $10 of media costs that they have to give to the gaming company, the publisher, right? The person that is actually owning the app where that ad gets slotted into and they're monetizing through the fact that they're showing ads to just random people playing their game, right? They're paying that money to the gaming company who is selling that ad slot. That would mean that $13 of revenue, AppLovin pays $10 to the and they keep about 30% of it, which is $3 in this case, and that is what they report as revenues. Now, what's What's about this is that because of the way that AppLovin works, that is a fixed cost that they're paying. So, there's a fixed cost to "Hey, we have to show 1,000 ads to get one install of an application." Hey, Mr. gaming company, how much will you charge us for 1,000 impressions? The gaming company says that they will charge $10 for that. And so, it ultimately doesn't matter to the gaming company whether AppLovin gets 1,000 installs out of that or zero installs out of that. That's for them to figure out. I am selling this ad slot. I am selling 1,000 impressions. I've absolutely no care whether or not AppLovin is actually able to convert on these ads on behalf of their advertiser.

10:07 Does not matter to me. I simply have an ad slot and I am monetizing that ad slot for $10 per 1,000 impressions, for example. And so, the great thing and the sort of parabolic thing that ends up happening here essentially is that because they have that fixed fee for those impressions, in theory, if you are paying for 1,000 impressions and you go from on average getting one install to, for example, getting five installations per 1,000, all of a sudden, you're now tapping into that operating levers that I mentioned. You're paying the same amount of money for more installations.

10:35 And because you are able to charge for more installations, and by extension to that, you're able to charge the advertiser for more money. So, again, just to put some numbers behind this cuz I really don't want anyone to be confused. In the original example, we had revenues of $13, meaning the advertiser paid AppLovin $13. AppLovin kept about three of those dollars because they have to pay 10 of those dollars, which is a fixed amount of money to the gaming company for, for example, 1,000 impressions. And as a result of those 1,000 impressions, they were able to convert on 13 of them, meaning that the conversion ratio was 1.3%. And so, with a 1.3% conversion ratio, AppLovin's revenue that they generate from that entire transaction is $3. Again, keep in mind when you're looking at this and reading it, Nick mistyped here. This is supposed to say net revenue. This is supposed to say gross revenue. Gross revenue being just the spend on the platform, right? I hope everybody understood that. Now, this is the interesting part. This is what I've been building up to this whole time. The entire point of the video.

11:26 AppLovin has the exact same $10 media cost. They pay the exact same $10 to for those 1,000 impressions to own them to that gaming company. Again, the gaming company just does not care at all whether or not all thousand of those impressions are turning into app installs or none of them are turning into app installs. All they care about is I'm getting paid X amount of dollars to be able to monetize my little shitty gaming app and that's it. Simple as that, right? And so in theory, if Apple 11's models over time and their behavioral data and the liquidity of their advertisers gets better over time, the conversion ratio goes from 1.3% to 5.2%. This is a direct number that actually the CEO gave out in the conference call, which I'll kind of get into in a second here, but just bear with me with the numbers. If that conversion ratio quadruples, 1.3 to 5.2%, the revenue doesn't just quadruple because again, there's fixed costs here.

12:11 The revenue goes from $3 to $42. That is a 14x. For a four times improvement in the conversion ratio, it is a 14 times improvement in the net revenue dollars that Apple 11 generates. And so this is the asymmetric sort of like parabolic nature of Apple 11's business if they're actually able to capitalize on a higher conversion ratio. Now, the important, super important question that we need to ask as investors and potential investors in Apple 11 is how do they actually go about improving that conversion ratio over time? And ladies and gentlemen, I have the answer for you. Very quickly, this is another one of Fiscal's very, very cool features. It's the query feature that I actually use quite a lot.

12:46 For example, I didn't actually know where the quote was in the conference call, but I went in here. I knew the number was 1.3% cuz that's what I remembered. I put Apple 11, searched up 1.3% and I was able to find it. Again, ladies and gentlemen, this is just scratching the surface with this platform. I use it in literally every single one of the videos. There's a link for it in the description down below. If you want to just give it a free trial, you know, you have absolutely nothing to lose and I'm sure you'll find it very useful. Anyways, moving on. Okay, so this is the exact quote that I'm talking about. Now, bear with me here. It'll again get a little bit complicated, but it'll kind of relate to everything that we've talked about thus far. Here's what Adam Foroughi says. This is the CEO of the company. He says, "We've got this opportunity to really expand the business if we execute as we go forward these new categories." Let me break that down for you. "We today have a 1.3% conversion rate on our ads that we serve. Said differently, we make money on 1.3% of the ads we serve. We lose money on 98.7% of the ads that we serve.

13:34 When the model knows a user is really prime for gaming, they're likely to turn the current game. They're likely to go to another game. We have well over a 5% conversion rate. This is what I call a high-value moment. Okay, so very quickly, across the entire AppLovin business, they have a 1.3% conversion rate. But when they know that a user is getting frustrated with a game, maybe they're playing it less and less and less. Maybe instead of hitting average scores of 100,000 in that game, they're starting to hit scores that are less.

13:59 Maybe they're getting worse at the game, right? Maybe they're playing it more infrequently, whatever the case is. When AppLovin is able, based off all the data that they've gathered over the past handful of years, knows that this user is likely to churn from this game very soon, and they serve them an ad to a very targeted game that's similar, or whatever the case is, their conversion ratio on those ads are 5%. And again, remember the math that I just gave you a second ago, how much more profitable a 5% conversion rate ad is compared to a 1.3% conversion rate ad. This is what he calls a high-value moment. Most of these impressions that the model serves for a gaming are not high-value moments. The reason they're not is that the user's playing a game that they like, and if you serve them a hundred gaming ads in a row, at some point that becomes annoying, and this is absolutely true, right? If I'm playing a game that I thoroughly enjoy, I love playing chess, right? And I'm playing chess, and I keep getting gaming ads for gaming ads that I don't care about. No matter how many gaming ads you give me, I'm not going to download other gaming apps. But if I was growing frustrated with chess, and then you serve me an ad for a similar strategy game, I might consider it. And that would be a high-value moment, as per the AppLovin CEO notes here. A very powerful recommendation system is meant to personalize content. In the absence of content diversity, that's a very important word right here, content diversity. It has to stick to what it knows, which in our case, originally, was just gaming. It's gaming, plus we've got the e-commerce brands, and we've got some of the other lead gen brands, but not a lot of them yet. Not a lot of density in every single category. Fast forward 5 years, let's say we have hundreds of thousands of customers, which I fully believe we'll get to.

15:21 What's going to happen in our platform? This powerful technology, which is inevitably going to get much better over time, it's going to be able to serve different products in every single ad impression. What he's basically saying is because of a lack of number of advertisers on the platform, the current state of AppLovin is regardless of if you are likely to turn, if you're part of that high-value moment, or if you are thoroughly enjoying playing chess, AppLovin, because of a lack of advertisers, has to lose a bunch of money and has to advertise all these ads that are actually maybe not the best ad to serve you in that moment. But if we fast forward 5 years and we have a variety of different advertisers, we have e-commerce companies, auto insurance, fintech, boom, boom, boom, whole bunch of different companies, AppLovin can then identify that in this moment in time, Arya is likely to, for example, download a ride-sharing app. In this moment in time, he might download Calcy. In this moment in time, we need to serve him a new game. And they have the behavioral data for all this stuff.

16:09 And so, that is what is ultimately the thing that I think the average AppLovin investor, the average investor who's looking at AppLovin misses, is the asymmetric opportunity ahead with this company. They're not simply going to double, triple, quadruple revenues. There is an opportunity ahead in the super bull case if they're like there's execution risk. Let's just get that out of the way, right? There's no guarantee that they'll be able to deliver on this, but they're confident that they're able to deliver on this as ad density goes up, which absolutely, in my opinion, makes sense. If you get more advertisers, you give them the advertisements at the right time when it is most personalized, that most fits their specific use case. It that just makes natural sense, in my opinion, right? And so, if they're able to capitalize on revenues do not double.

16:45 They don't triple. They don't quadruple. They likely 10x, 15x, something in that ballpark over the next 5 years. If that conversion ratio is able to improve, this is a multi-multi-multi-multi-bagger stock on our hands. And today you can buy it 24 times earning. What's really in about it is it doesn't need like the thesis doesn't even rely on any of this playing out. They, in the same earnings call, they talk about and I'm not going to bother pulling up the quote. it.

17:08 In the same earnings call or conference, whatever, they talked about this like longer-term 20 to 30% growth that they think is a sustainable level for their mobile gaming ecosystem that they can achieve over the next decade. This is the guy This is like the long-term guidance that they think is sustainable for their business. And obviously, in the past 3-4 years, they've absolutely demolished those numbers. If you look at the core software business during this period, they have done way faster than 20 to 30%. Their worst quarters were 34, 24, 28%. Since IPO, they've had Is that literally three? They know they've had two quarters within that range, right?

17:41 So, they've completely demolished those numbers, and I have full belief that they'll actually be able to deliver on those numbers over the decade literally just off the back of the gaming vertical alone. If they don't capitalize on e-commerce, if they don't capitalize on fintech, auto insurance, if we ignore what Nick tweeted today with his experience with AppLovin house the lowest cost per install, clearly it's working for categories other than gaming. If we ignore all of that, the stock trades at 24 times earnings.

18:05 There's not much factored into the valuation at the current price. In fact, at these prices, I would personally be happy with 12% revenue growth for the next decade. I think the the stock would work out scenario. The only scenario you kind of get bit here is if the margin start to decline, which as I mentioned to you in the first half of the video, there's a ridiculous amount of operating levers built into the business that is very, very unlikely to happen. All in all, the stock is disgustingly undervalued, has a disgusting amount of optionality, and I hope you enjoyed my little rant in today's video. With that being said, I am certainly, in the next handful of months, going to be buying more shares of this business. If you want to see when I'm buying it, my portfolio is always going to be free.

18:43 It's linked in the description over on Blossom. You can see the whole thing. Unfortunately, at the moment, little bit low on cash, but we should be coming into a solid amount of money over the next month. I'll save those details for maybe a different announcement if and when it actually happens. Some stuff is in the works in the background. With that being said, if you want to catch our original AppLovin deep dive when I explain the moat of the company a little bit more and kind of give 12-13 minute analogy on why it's a powerful business on that front, that video is up on screen right now. Thank you very much for watching, and be sure to check me out on Blossom, link in the description down below, and have a great day.