Sector

Gaming

Background

Adam Foroughi is the CEO and co-founder of AppLovin. We cover the major components of AppLovin, how the mobile games business feeds their software platform, and the importance of staying nimble while experiencing rapid growth.

Cover

Date

April 20, 2022

Episode Number

55

AppLovin Business Breakdown: Key Takeaways and Dynamics

Background / Overview

AppLovin, founded in 2012 in Palo Alto, California, is a technology platform that empowers mobile app developers to market, monetize, and grow their applications. Initially pivoting from app development to building a marketing platform, AppLovin identified a gap in the early mobile app ecosystem: developers lacked sophisticated tools to promote and monetize their apps effectively. The company has since evolved into a dual-segment business, comprising a high-margin software platform (ad tech) and a portfolio of mobile gaming studios (apps). With approximately 1,500 full-time employees (FTEs) as of recent estimates, AppLovin operates globally, serving tens of thousands of app developers and reaching billions of monthly active consumers through its advertising network.

The founding story highlights a lean, product-centric approach driven by necessity. Unable to secure venture capital (VC) funding in 2012 due to skepticism about ad tech and mobile gaming, AppLovin bootstrapped its growth, achieving profitability by the end of its first year. This forced discipline shaped its philosophy of automation, organic growth, and capital efficiency, distinguishing it from VC-backed peers that prioritized rapid hiring and capital raises. The company went public in 2021, and its CEO, Adam Foroughi, retains significant ownership, a rarity for a firm of its scale, reflecting the early funding constraints that proved advantageous.

Ownership / Fundraising / Recent Valuation

AppLovin’s ownership structure is notable for its lack of heavy VC dilution. The inability to raise VC funding led to reliance on angel investors, personal capital, and early profitability, resulting in Foroughi owning a substantial portion of the company compared to typical VC-backed tech firms. The company raised minimal external capital until its IPO in April 2021, which valued it at approximately $28.6 billion at debut. As of April 2025, AppLovin’s market capitalization fluctuates around $20-25 billion, reflecting public market dynamics and sentiment toward ad tech.

Post-IPO, AppLovin announced a $750 million share buyback program in 2022, an unusual move for a recently public company, signaling confidence in its cash flow generation and undervaluation. The company has also pursued strategic acquisitions, such as MoPub from Twitter and Adjust, to bolster its software platform. While exact enterprise value (EV) multiples for these transactions are undisclosed, the focus on larger, strategic deals over smaller tuck-ins suggests a disciplined capital allocation strategy aimed at minimizing distraction and maximizing integration value.

Key Products / Services / Value Proposition

AppLovin operates two economically separable segments: Software Platform (ad tech) and Apps (mobile gaming studios). Below is a breakdown of their value propositions:

Software Platform

The software platform is AppLovin’s core offering, targeting app developers with tools to optimize monetization and user acquisition:

• MAX: An in-app mediation platform that runs real-time ad auctions, maximizing developer revenue by selecting the highest-paying ad from multiple networks (e.g., AppLovin, Google, Facebook). It’s the market leader in third-party mediation.
• AppDiscovery: A user acquisition tool that leverages machine learning to target high-value users, ensuring advertisers achieve specific ROAS goals (e.g., $100 revenue per $1,000 spent in 24 hours).
• Adjust: A mobile attribution and analytics SaaS platform acquired in 2021, providing developers with insights into user behavior and campaign performance.

The value proposition is performance-based advertising, where developers pay only for measurable results (e.g., installs, revenue). This contrasts with traditional ad tech, which sells impressions (CPM) without guaranteed outcomes. Automation and data-driven optimization ensure developers achieve predictable returns, fostering stickiness.

Apps

AppLovin’s gaming studios, acquired starting in 2018, produce casual mobile games like Project Makeover. These studios serve a dual purpose:

1. Data Generation: Provide deep engagement data (e.g., session length, in-app transactions) to enhance the software platform’s machine learning capabilities.
2. Revenue Stream: Generate revenue through in-app purchases and ads, though with lower margins due to high user acquisition costs and app store fees (30%).

The apps segment is strategically less critical today, as third-party developers now share similar data, reducing reliance on owned studios. However, it remains a significant revenue contributor and a testing ground for platform innovations.

Segments and Revenue Model

AppLovin’s revenue model is segmented as follows:

• Software Platform (67% of 2022 revenue, ~$1.4B): Revenue is derived from advertisers paying for user acquisition (AppDiscovery), mediation services (MAX), and SaaS subscriptions (Adjust). The model is performance-based, with advertisers setting ROAS or CPI goals. AppLovin retains a portion (20-30% on average) of ad spend after paying publishers, reported as net revenue.
• Apps (33% of 2022 revenue, ~$0.7B): Revenue comes from in-app purchases and ads within owned games, reported gross (before app store fees of ~30%). User acquisition costs are significant, reducing margins.

The software platform’s revenue is highly predictable due to its performance-based nature, while the apps segment is more volatile, tied to game performance and market trends.

Splits and Mix

Revenue Mix

• 2020: Software ~14-15%, Apps ~85-86%.
• 2022: Software ~67% ($1.4B), Apps ~33% ($0.7B).
• 2023 (Projected): Software ~50% ($1.5B), Apps ~50% ($1.5B).

The shift toward software reflects rapid growth in MAX and AppDiscovery, driven by data improvements and market leadership in mediation. The apps segment’s relative decline is intentional, as AppLovin deprioritizes studio acquisitions.

EBITDA Mix

• Software: Contributes ~80-90% of EBITDA due to high margins (70-80%).
• Apps: Contributes ~10-20% of EBITDA due to lower margins (20-30%).

Channel Mix

• Software: Direct to developers via self-serve platforms; no significant sales force until recently, emphasizing automation.
• Apps: Distributed through Apple and Google app stores, with marketing via AppLovin’s own ad platform.

Geo Mix

AppLovin serves a global developer base, with significant presence in the U.S., China, Turkey, Pakistan, and Western Europe. The consumer audience is equally global, with billions of monthly active users across ~100,000 apps.

Customer Mix

• Software: Tens of thousands of app developers, ranging from solo developers to large studios (e.g., Supercell). The focus is on fragmented, marketing-driven categories like mobile gaming.
• Apps: Millions of casual gamers, primarily engaging with free-to-play titles.

End-Market Mix

• Software: Predominantly mobile gaming (~70% of app store transaction value), with growing exposure to utilities and connected TV.
• Apps: Exclusively mobile gaming.

Growth Dynamics

• Software: Grew from $200M (2020) to $670M (2021) to $1.4B (2022), with a projected $2B in 2023 (49% CAGR). Driven by MAX adoption, data enhancements, and market consolidation.
• Apps: Stable at ~$0.7B, with slower growth due to reduced acquisition activity.
• Mix Shift: Software’s increasing share reflects higher profitability and strategic focus, while apps remain a data and revenue contributor.

KPIs

• Ad Impressions: Billions daily, across ~100,000 apps.
• Monthly Active Consumers: ~2 billion.
• Revenue Growth: Software at 49% CAGR (2020-2023); total revenue at ~30% CAGR.
• EBITDA Margin: Software ~70-80%, Apps ~20-30%, blended ~50%.
• FCF Conversion: High due to low capex and efficient NWC management.

Acceleration is evident in the software segment, driven by MAX’s market leadership and data flywheel. The apps segment shows deceleration as acquisition activity slows.

Headline Financials

Revenue Trajectory and Drivers

• Software: Explosive growth (49% CAGR) driven by:
• MAX Adoption: Market-leading mediation platform, consolidating competitors like MoPub.
• Data Flywheel: Owned studios provided initial engagement data, now supplemented by third-party developers, enhancing ad targeting.
• Performance-Based Model: Ensures predictable ROAS, attracting developers in fragmented categories like gaming.
• Apps: Slower growth due to strategic shift away from studio acquisitions. Revenue is driven by in-app purchases and ads, with high user acquisition costs limiting scalability.

Cost Trajectory / Operating Leverage

• Variable Costs:
• Software: Primarily publisher payouts (70-80% of ad spend), leaving 20-30% as net revenue. Serving costs (e.g., cloud infrastructure) are nominal at scale.
• Apps: App store fees (30%), user acquisition costs (significant), and game development costs.
• Fixed Costs:
• Software: Engineering headcount, G&A (~2% of revenue), and R&D. High operating leverage as revenue scales without proportional cost increases.
• Apps: Studio operations, marketing, and overhead. Less leverage due to ongoing user acquisition spend.
• EBITDA Margins:
• Software: 70-80%, reflecting low variable costs post-publisher payouts.
• Apps: 20-30%, constrained by app store fees and marketing.
• Blended: ~50%, improving as software’s share grows.

Capital Intensity and Allocation

• Capex: Low, primarily cloud infrastructure and office facilities. Estimated at <5% of revenue.
• NWC: Efficient, with short cash conversion cycles due to real-time ad transactions. Minimal inventory or receivables buildup.
• FCF: Strong, with $900M in 2022 (43% margin). High conversion reflects low capex and NWC requirements.
• Capital Deployment:
• M&A: Strategic acquisitions (e.g., MoPub, Adjust) to enhance software capabilities. Shift toward larger deals to minimize distraction.
• Buybacks: $750M program announced in 2022, reflecting confidence in undervaluation and excess cash flow.
• Organic Growth: Heavy R&D investment in MAX, AppDiscovery, and emerging areas like connected TV and blockchain.

Value Chain Position

AppLovin operates midstream in the mobile app value chain, bridging developers (content creators) and consumers (end-users) through advertising and monetization solutions. The value chain includes:

• Upstream: App developers creating content (games, utilities).
• Midstream: Platforms like AppLovin, providing discovery, monetization, and analytics.
• Downstream: App stores (Apple, Google) and consumers.

Primary Activities

• Ad Optimization: Machine learning-driven ad targeting and auction management (MAX, AppDiscovery).
• Data Processing: Aggregating engagement data to enhance targeting accuracy.
• Content Creation: Owned studios produce games, feeding data back into the platform.

GTM Strategy

• Software: Self-serve, developer-centric platform with minimal sales overhead. Developers integrate SDKs and set campaign goals, with automation handling the rest.
• Apps: Distributed via app stores, with marketing leveraged through AppLovin’s ad platform to acquire users.

Competitive Advantage

AppLovin’s value-add lies in its performance-based model and data flywheel. By optimizing ad relevance, it increases developer revenue, enabling reinvestment in user acquisition. The MAX auction’s market leadership provides a structural advantage, as developers prefer established, high-liquidity platforms.

Customers and Suppliers

Customers

• Software: App developers, primarily in mobile gaming (e.g., solo developers, Supercell). Fragmented, marketing-driven categories are ideal, as they rely on discovery.
• Apps: Casual gamers, typically engaging with free-to-play titles.

Suppliers

• Publishers: Apps displaying ads, paid 70-80% of ad spend.
• App Stores: Apple and Google, charging 30% fees on in-app purchases.
• Cloud Providers: Google Cloud, supporting data infrastructure.

Pricing

Software

• Contract Structure: Performance-based, with developers setting CPI or ROAS goals (e.g., $2 CPI, $100 revenue per $1,000 spend).
• Pricing Drivers: Supply-demand dynamics in ad auctions, developer willingness to pay, and consumer engagement data quality.
• Visibility: High, as campaigns are real-time and data-driven.

Apps

• Pricing: In-app purchases ($0.99-$99), ad-based monetization.
• Contract Length: None; revenue tied to user engagement.
• Stickiness: Moderate, as gamers can switch to competing titles.

Bottoms-Up Drivers

Revenue Model & Drivers

• Software:
• Model: Developers pay for user acquisition (AppDiscovery) or mediation services (MAX). Revenue is net of publisher payouts (20-30% take rate).
• Volume: Billions of daily impressions across ~100,000 apps.
• Price: Average $2 CPI, though varies by campaign goals.
• Drivers: Data quality (engagement metrics), MAX adoption, and market fragmentation.
• Apps:
• Model: In-app purchases and ads, reported gross.
• Volume: Millions of daily active users.
• Price: Low ASP for purchases, supplemented by ad revenue.
• Drivers: Game quality, user acquisition efficiency, and market trends.

Cost Structure & Drivers

• Variable Costs:
• Software: Publisher payouts (70-80%), cloud costs (<5%).
• Apps: App store fees (30%), user acquisition (~30-40% of revenue).
• Fixed Costs:
• Software: Engineering, G&A (~2%), R&D.
• Apps: Studio operations, marketing.
• Operating Leverage: High in software due to fixed costs scaling slowly; moderate in apps due to ongoing marketing spend.

FCF Drivers

• Net Income: Driven by software’s high margins, offset by apps’ lower profitability.
• Capex: Minimal, enhancing FCF conversion.
• NWC: Efficient, with short cycles due to real-time transactions.
• FCF: ~$900M in 2022, with potential to reach $1.2B in 2023.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Mobile App Advertising: $200B globally in 2022, growing at ~10% CAGR, driven by gaming (70% of spend).
• Mobile Gaming: ~$100B in revenue, with ~5% CAGR, fueled by casual gaming.
• Connected TV: Emerging opportunity, with ~$20B in ad spend, growing at 15% CAGR.

Market Structure

• Fragmented: Thousands of developers, with no single player dominating. Top studios (e.g., Supercell) coexist with solo developers.
• Oligopolistic Platforms: Apple and Google control app stores, while AppLovin, Google, and Facebook dominate ad mediation.
• MES: High for ad platforms due to data and scale requirements, limiting new entrants.

Competitive Positioning

AppLovin targets fragmented, marketing-driven categories (e.g., gaming), offering performance-based solutions. It competes with Google, Facebook, and smaller players like IronSource, but its MAX auction and data flywheel provide differentiation.

Market Share & Growth

• Share: ~10-15% of mobile app ad spend, growing faster than the market due to MAX’s dominance.
• Relative Growth: Software revenue (49% CAGR) outpaces market growth (10%), driven by consolidation and data advantages.

Hamilton’s 7 Powers Analysis

1. Economies of Scale: High in software, as fixed costs (engineering, R&D) are spread over billions of impressions. MAX’s scale deters new entrants.
2. Network Effects: Moderate, as more developers and advertisers enhance the ad auction’s liquidity, benefiting all participants.
3. Branding: Limited, as AppLovin operates B2B with a functional value proposition.
4. Counter-Positioning: Strong, with a performance-based model that traditional ad tech (CPM-based) struggles to replicate.
5. Cornered Resource: Data flywheel, combining owned and third-party engagement data, is difficult for competitors to match.
6. Process Power: Automation and machine learning optimize ad delivery, creating a cost and efficiency advantage.
7. Switching Costs: High for developers, as integrating MAX or AppDiscovery SDKs is time-intensive, and performance drives stickiness.

Strategic Logic

• Capex: Minimal, with focus on R&D for software enhancements.
• Vertical Integration: Owning studios provides data, but third-party data reduces this need.
• Horizontal Expansion: Connected TV and blockchain as new markets to leverage existing tech.
• M&A: Larger, software-centric deals to avoid distraction and maximize synergies.

Valuation

AppLovin trades at ~6-8x FCF (based on ~$900M FCF and $20-25B market cap), a low multiple for its 30% revenue CAGR and 50% EBITDA margins. The buyback program suggests management views the stock as undervalued. Risks include platform changes (e.g., Apple, Google) and privacy regulations, but strong cash flow and growth prospects mitigate these concerns.

Unique Dynamics and Insights

1. Performance-Based Model: Unlike traditional ad tech, AppLovin’s focus on ROAS ensures predictable returns, aligning incentives with developers and fostering stickiness.
2. Data Flywheel: Owning studios unlocked deep engagement data, proving the model and attracting third-party data, creating a self-reinforcing cycle.
3. MAX Auction Leadership: Controlling the largest third-party ad auction provides structural advantage, as competitors must participate, enhancing liquidity.
4. Capital Efficiency: Early funding constraints forced automation and profitability, enabling high FCF margins and flexibility for buybacks and M&A.
5. Fragmentation Dependency: AppLovin thrives in fragmented categories like gaming, where discovery is critical, unlike consolidated utility apps (e.g., Uber).
6. Nimble Culture: A lean, engineering-driven organization with minimal bureaucracy supports rapid innovation and high retention.

Critical Observations

• Sustainability: The software platform’s high margins and scalability make it the core growth driver, but reliance on two app stores introduces platform risk.
• Apps Segment: While strategically valuable for data, its lower margins and volatility suggest potential for divestiture if third-party data sufficiency persists.
• Privacy Risks: Ongoing regulatory changes (e.g., GDPR, Apple’s ATT) require constant adaptation, though AppLovin’s consent rates (35-40%) indicate resilience.

This breakdown reveals AppLovin’s unique position as a performance-driven ad tech leader, leveraging data and scale to dominate a fragmented, high-growth market while maintaining capital discipline.