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

AppLovin's stock has plummeted over 50% in 2026, marking it as one of the largest market losers this year. Despite this decline, the company is experiencing significant growth akin to an early-stage startup, with revenue increasing by over 50% year over year. Its current valuation has reached a mid-teens multiple, indicating it is now in value territory.

Kyle O'Malley pointed out that AppLovin ranks first on Yahoo Finance's list of companies trading closest to their 52-week lows. The company specializes in mobile app advertising, contrasting with competitors like the Trade Desk, which focuses on connected TV advertising. Both firms have faced stock declines amid concerns about AI disruption, though the actual impact of AI on AppLovin's business model remains uncertain.

AppLovin's advertising expenditures exceed the combined revenues of Pinterest, Snapchat, and Reddit, as the company aims to enhance ad spend efficiency for advertisers. Its core products connect publishers and advertisers, with founder Adam Froge having a notable history in advertising technology. The company has evolved from a recommendation algorithm developed from a failed app since its inception in 2012.

Kyle Grieve noted that AppLovin previously turned down a $600 million cash offer in 2015, and it is now valued at just over $100 billion, with projections suggesting it could approach $250 billion by the end of 2025. He emphasized the importance of corporate governance, citing the absence of a board of directors until 2018, which led to mistakes in capital markets.

AppLovin operates through four segments: the ads manager, Max, Adjust, and Whirl. The ads manager aids advertisers in customer acquisition, while Max helps publishers optimize their ad revenue. Adjust offers measurement and analytics for app marketing, and Whirl functions as a connected TV platform. The company captures a spread of 30 to 40% between what advertisers pay and what publishers receive, with potential for increased capture through better matching.

In the episode, Grieve and O'Malley discussed AppLovin's market position and performance, noting a nearly 40% compounded revenue growth and an impressive EBITDA margin exceeding 79% over the past year. The company has achieved a high return on invested capital of 113%, although it faces limited reinvestment opportunities compared to larger tech firms. Grieve highlighted AppLovin's competitive advantage stemming from its customer understanding and scale economics, supported by a data learning flywheel.

O'Malley criticized the sale of gaming studios to Triple Doc for about $800 million, viewing it as a reduction in AppLovin's vertical integration in advertising. This divestiture allowed the company to concentrate on its advertising business but raised concerns about potential competition as AppLovin's growth could attract new entrants.

The discussion also covered AppLovin's buyback strategy, where the company spent $2.5 billion to retire approximately 70 million shares from 2022 to 2024, with $1.4 billion spent in 2023 alone. O'Malley noted that these buybacks have provided liquidity for early investors without causing market panic, although he cautioned that management may have been overly aggressive with the timing.

Despite strong financials, AppLovin's stock price has seen volatility, dropping from over $700 to around $314. O'Malley predicted that if shares trade at $600 or more in two years, the buybacks will be viewed as value-creating. However, concerns linger regarding the company's modest valuation and the effectiveness of its M&A strategy, which has yielded mixed results.

AppLovin's capital allocation is considered average, with Adam Farogi holding a 9% economic stake and 62% voting rights due to class B shares. Farogi's compensation in 2023 exceeded $83 million, although this figure is based on grant date accounting value. The company's stock has declined nearly 60% overall and about 30% since its Q2 earnings report on August 5th.

Despite these challenges, AppLovin reported year-over-year revenue growth of 53% and profits increasing by 55%. However, it missed revenue projections by $20 million, raising concerns about decelerating growth and margin guidance. Grieve noted the unusual absence of an investor deck for a tech company, suggesting that AppLovin's business model appears less robust compared to competitors like Google and Meta.

AppLovin's install volume is declining, indicating potential market saturation, although its eCommerce segment has shown growth, increasing by 28% in the latest quarter. O'Malley highlighted the company's strong market presence, which could lead to future cash flow, but warned of challenges if it cannot capture additional market share. The introduction of a new social media app, GIST, is seen as a potential growth driver, though skepticism about its scalability remains.

Grieve expressed doubts about investing in AppLovin, citing real hurdles to continued growth and a preference for share buybacks over cash reserves. He predicted a price target of around $480, suggesting a 9% CAGR if the market is incorrect about the company's prospects. O'Malley echoed the uncertainty surrounding AppLovin's future, questioning whether it represents a buying opportunity or a value trap.