Surging 30%! How did Applovin beat the shorts?

$AppLovin(APP.US) released its Q4 2024 financial report after the market close on February 12, Eastern Time. With market expectations already high, AppLovin did not disappoint and delivered an almost perfect report! Dolphin believes that behind the surface performance indicators exceeding expectations lies a more critical point—the growth logic of AppLovin's e-commerce advertising is gradually being validated.

The Total Addressable Market (TAM) for e-commerce advertising, compared to game advertising, is the difference between a pond and the ocean. Therefore, once AppLovin is recognized by the market as capable of making significant strides in the e-commerce advertising field, the growth expectations will be significantly elevated, and the valuation will naturally step into a higher tier.

Specifically:

1. Q1 guidance significantly beats expectations: For AppLovin, what Dolphin is most concerned about is the guidance for Q1 2025. This is not only because it is the beginning of a new fiscal year, but more importantly, AppLovin's growth focus is undergoing a significant shift—from the gaming market to the e-commerce retail market.

The advertising revenue guidance for Q1 2025, which clearly exceeds market expectations, may indicate that management is very confident in advancing the penetration of e-commerce advertising. This resonates with the feedback from channels at the end of the year—small and medium advertisers were pleasantly surprised by the testing results (advertising ROAS) from AppLovin, believing that in terms of monetization efficiency ROAS alone, it is comparable to social media giant Meta (although the click conversion is not as good as Meta, AppLovin's CPM is significantly lower).

2. Signs of increased investment in Q4: The performance in Q4 also impressed the market. Ultimately, it stemmed from the unexpected advertising revenue, while the advertising profit margin (Adj. EBITDA) slightly declined by 0.5 percentage points quarter-on-quarter. Breaking down the cost expenses, Dolphin estimates that the cost of server bandwidth amortization and depreciation, as well as the cost of renting third-party cloud services, has seen a certain increase.

However, for its own app services, the company continues to proactively adjust under the goal of improving overall operational efficiency (EBITDA), which has also led to further layoffs in Q4. Following the wave of over 60 layoffs in August, another 120 employees were optimized in Q4 (excluding the split of Adjust), resulting in more severance expenses.

3. Soul-searching question: Why can AppLovin succeed across fields?: Regarding the performance in Q4 and the guidance for Q1 2025, although institutions have certain expectations for AppLovin's initial progress in e-commerce advertising through channel research, the biggest expectation gap currently is why it can gain favor from advertisers Dolphin has the same curiosity. Although in previous in-depth analyses, Dolphin believed that Applovin had the potential to gain some share in e-commerce advertising, it also expressed a small concern that Applovin lacked an advantage in user data in the e-commerce field and would need to put in some effort during the process (such as increased sales expenses for channel development).

However, it is clear that whether in terms of research findings or the customer acquisition efficiency shown in Q4, Applovin, at least in the early stages of promoting e-commerce advertising, is actually more likely to attract customers proactively.

So what is the rarity of Applovin for e-commerce retail advertisers?

Through research, Dolphin believes there are three points that need to be emphasized and adjusted in perception:

(1) Overlapping target user groups: Although Applovin's main market is in gaming, for target users who are more willing to accept in-game advertisements, this group tends to be older, female light gamers (medium to heavy users are more likely to choose direct payment rather than ad incentives). This group actually overlaps significantly with the target users of e-commerce retail advertisers. Therefore, retail advertisers, especially those with female-oriented products (such as cosmetics), can achieve good advertising ROAS by choosing Applovin, which has a more concentrated target group and lower pricing.

(2) Higher attention duration: Generally speaking, the attention or duration of the same user in gaming applications is significantly higher than that of browsing interactions on ordinary web pages or community platforms. For typical 30s to 60s game ad incentives, users generally cannot swipe past like on Instagram or skip after watching 5s-10s on YouTube. Therefore, placing game incentive ads allows advertisers to gain higher attention and potential conversion rates.

(3) Avoiding over-reliance on a single channel: In recent years, leading advertising platforms have shown significant competitive advantages due to inflation and technological advancements, reflected in the continuous rise of eCPM prices over multiple quarters. Especially for Meta, some small and medium-sized businesses have gradually found it burdensome. Therefore, avoiding over-reliance on a single marketing channel is one of the core demands of advertisers, especially small and medium-sized advertisers.

The emergence of Applovin undoubtedly addresses the urgent needs of these small and medium advertisers. Although Applovin may not have the broad behavioral data advantages of social media (more focused on user background tag data), it can achieve almost the same high ROAS at 1/5 of the price, leaving retail advertisers with no reason not to give it a try.

In contrast to TikTok's early advertising promotion, as an intermediary platform, Applovin can quickly expand the upper limit of advertising inventory without a significant ceiling. In this case, the CPM pricing for a period will not rise sharply in the short term due to tight available inventory, causing unstable fluctuations in ROAS.

Therefore, under the core logic of the above <1-3>, Applovin will not encounter too much resistance at least in the initial penetration of e-commerce advertising. More importantly, the e-commerce retail advertising market is several times larger than the gaming advertising market. Even if Applovin only captures a small share, it is enough to bring a dramatic increase to the current advertising revenue of less than 5 billion This also reflects the strong market reaction to the Q4 financial report, with a 30% surge after hours indicating positive expectations.

4. Overview of Key Financial Indicators

Dolphin's Viewpoint

Objectively speaking, before the Q4 financial report, the market's short-term performance and development prospects for Applovin were relatively positive, specifically reflected in the current valuation level, which has already partially incorporated expectations for e-commerce advertising achieving scales of 100-200 million, 500-1,000 million, and 1-1.5 billion in 2025, 2026, and 2027 respectively, with continuous acceleration in growth. Although this scale is obviously not high compared to leading e-commerce advertising platforms, it has already brought about total revenue increments of 5%+, 10%+, and 15%+ for Applovin, along with faster profit growth expectations.

However, at the same time, the gaming market continues to linger at a low speed, and Applovin's share in the in-app advertising market for games has exceeded 30%, making it the actual leader. Even if there is still potential for further improvement, the difficulty is undoubtedly increasing significantly.

Therefore, the market capitalization of 125 billion before the financial report implies a valuation that is significantly higher than that of advertising platform peers like Meta and Google—relative to the performance in 2026, an EV/adj. EBITDA of 28x already includes part of the e-commerce advertising expectations and places Applovin in comparison with similar software platforms.

This is also one of the reasons why Applovin was shorted by well-known analyst Lauren Balik at the end of last year. In addition, Balik mentioned concerns about Applovin misleading users into clicking ads, the excessively high loading rates of game ads, and the complex equity structure suspected of money laundering. Regarding the last point, Dolphin will not discuss it for now. However, based on previous research, advertisers are not unaware of the first two issues. But due to the advantages in conversion efficiency, it seems that advertisers still do not have better choices in the short term. Perhaps it will take until Unity improves its algorithm recommendation system and optimizes advertising technology to impact customer demand.

Even under such positive expectations, Applovin still delivered an unexpectedly strong current performance and attractive guidance, with the only flaw—revenue from proprietary apps falling short of expectations—being negligible under the core growth logic of e-commerce advertising. Moreover, the management is also actively adjusting (even directly announcing the divestiture of this business during the post-earnings call) to improve the monetization rate (EBITDA) of its proprietary app business, ensuring that the short-term adjustments did not drag down profits. Therefore, the market's excitement surged by 30% after hours, not only reflecting optimism about Applovin establishing a foothold in the broader e-commerce advertising market but also rewarding the management's clear thinking and efficient operational capabilities. After a surge, Applovin, with a market value of 165 billion, corresponds to the market expectations for 2026 (Dolphin has raised it by 10%), with an EV/adj. EBITDA of 33x. The CAGR growth rate for the next three years in 2026 is expected to remain above 25%. Although the current valuation is not low compared to peers, it still does not show obvious bubbles when compared to itself. If the respective issues of competitors like Unity and TikTok are still difficult to resolve in the short term, then Applovin's strong period is likely to continue.

The following is a detailed analysis

1. Advertising exceeds expectations, officially entering the e-commerce field

In the fourth quarter, Applovin achieved total revenue of 1.37 billion, a year-on-year increase of 44%, accelerating compared to Q3. This not only exceeded the company's previous guidance upper limit of 1.26 billion but also surpassed market consensus expectations.

The major portion, advertising revenue (originally software service revenue), reached a growth rate of 73%, achieving nearly 1 billion in revenue, which is also the main area of exceeding expectations. The revenue from self-owned apps in the fourth quarter also slightly exceeded expectations, although it is still in the process of active adjustment.

Applovin's rapid growth over several quarters seems very disconnected from its main market—the gaming industry. According to Sensor Tower's mobile game data, the overall gaming and casual gaming revenue growth rates have slightly declined. However, there has been a certain recovery in download numbers, which are more relevant to Applovin's monetization. Nevertheless, such industry performance does not provide much help for Applovin's growth, so Applovin relies more on its own Alpha to capture a larger share.

Currently, Applovin's market share in the advertising intermediary industry has reached 10%. In the more segmented and precise game customer acquisition advertising sub-market, Applovin has taken the lead, even surpassing Google and Meta. If all Q4 advertising is included in game-related advertising, Applovin's market share could exceed 30% in 2024, an increase of 10 percentage points compared to 2023, which is higher than the 7 percentage point increase from 2023 relative to 2023.

Although it cannot be ruled out that the speed of market share growth may accelerate in 2024 driven by Axon 2.0, it is clearly not easy to increase market share further from an already significant level. Therefore, based on market expectations and channel feedback, Dolphin estimates that among the $1 billion in advertising revenue for Q4, there may be $50 million to $100 million in e-commerce advertising revenue. This is higher than the relatively optimistic institutional expectations of $30 million to $50 million prior to the earnings report, implying that Applovin's push for e-commerce advertising is progressing very smoothly in the short term.

II. AI Investment May Be Confirmed, Continuing to Maintain High Profitability Through Layoffs

In the fourth quarter, the overall company achieved an EBITDA profit margin of 61.8%, slightly exceeding market expectations, with the main difference in expectations being the adjustment intensity of its own apps—the company actually took more aggressive efficiency measures. On one hand, the layoffs were more intense, and on the other hand, the guidance for next quarter indicated a faster revenue decline, indicating that more inefficient studios were closed in Q4, allowing the EBITDA profit margin for its own apps to return to a high level of 19% in Q4.

However, the advertising profit margin actually decreased quarter-on-quarter (from 78.2% in Q3 to 77.7%). Dolphin estimates through breakdowns that the additional expenses do not seem to be used for e-commerce customer acquisition marketing expenses (which still declined year-on-year in Q4). Instead, there were increases and upward trends in other costs within operating expenses, such as "server amortization costs" and "third-party cloud service rental costs." (The following are Dolphin's estimated values; specific figures need to be checked in the complete annual report submitted to the SEC.)

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3. Bright Outlook, Growth and Profitability Not to Be Missed

For Applovin, which bets its valuation on future growth, the management's outlook is very important. Short-term outlook for Q1 2025:

(1) Optimistic Advertising Outlook: It is expected that Q1 advertising revenue will grow by 52%-55% year-on-year, significantly higher than the market expectation of 40%. It is anticipated that Q1 revenue from its own apps will decline by 12%-15% year-on-year, continuing to worsen compared to Q4. Clearly, management is still actively adjusting the App business to improve overall operational efficiency.

(2) Stable Improvement in Profitability: Despite entering a new market segment and the increasing amortization costs of upfront AI infrastructure investments and cloud service leasing expenses as the business expands, management has high confidence in the company's operational efficiency, guiding that the EBITDA profit margin is still on an upward trend. The overall EBITDA profit margin is expected to increase from 62% in Q4 2024 to a level of 63% to 64%.

Both advertising and own app margins have improved. The increase in advertising profit margin comes from revenue expansion driven by e-commerce advertising, while the improvement in own app profit margin is still due to proactive adjustments (closing inefficient operating studios).

Overall, this is a strong guidance. Despite the "flaw" of app revenue falling short of expectations, it is negligible under the core growth logic of e-commerce advertising. Moreover, in terms of strategic thinking, management is further enhancing the monetization rate (EBITDA) of its own app business through proactive adjustments, ensuring that short-term adjustments do not drag down profits.

In the shareholder letter, management mentioned the strategic keywords for 2025, which Dolphin summarized as "Product First," "Technology Investment," "Efficiency First," "Ecosystem Win-Win." However, regarding the medium to long-term strategic guidance, especially as Applovin has largely completed its growth path in the gaming market, the current market is most concerned about how to focus efforts on "continuously" capturing market share after entering the e-commerce advertising market. It is recommended to pay attention to management's relevant responses during the earnings call, and Dolphin will also share the summary content later in the Longbridge App and user group.

Dolphin's Historical Research on "Applovin"

In-depth

The next article covering the initial coverage on January 10, 2025, is titled “[Can Unity replicate Applovin's 'money-making ability' by following the same pattern?](https://longportapp.com/zh-CN/topics/26553047? invite-code=032064)》

On January 3, 2025, the first coverage of the article "The Great Reveal of Applovin: A Winning Game Planned for Five Years"

The risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure