持有APP，对管理层执行力和电商业务增长的信心支撑了合理的风险回报，尽管近期股价有所下跌。

how did a mobile gaming company that most investors had never heard of prior to a few years ago, no one had ever talked about the company AppLovin. If you go on X right now, you're gonna see a lot about AppLovin because the stock fell 38% or around there after their most recent earnings report.

But how does this small company carve out a niche in digital ads? We'll lay a foundation and build this out because that's how you're gonna understand how this happened, what AppLovin does, and how it plays in this market with other bigger players in digital advertising.

We refreshed these slides that we made from last year when we were talking about The Trade Desk and AppLovin.

So now let's tie AppLovin into this. How did they become one of the largest software companies in the world? Especially just the last couple of years, and all in digital advertising, going up against the big walled gardens.

It was mobile games. That was certainly a little surprising for me to understand. But AppLovin, in 2012, started something very unglamorous. They were helping mobile game developers find new players.

And we're gonna get to why that has worked against AppLovin more recently. Mobile gaming was much higher growth a decade ago than it is now. It's still expected to be probably a mid-single digit total market growth industry. The largest and fastest growing segment of the video game industry, which is still huge and it's still growing. So it's not like this market is all tapped out for AppLovin, but that's originally how they did it, and then they had the Axon 2.0 AI-powered software suite a few years ago that came out that supercharged that.

The algorithm was really great at matching the right gamer with the publisher, the developer of the mobile game app. And this is where you see AppLovin paired up in our slide here with other software companies like Unity, another game developer, and Digital Turbine, as well as Taboola.

Yeah, and this is why, AppLovin isn't really a DSP or an SSP. It's more like a marketplace in the middle. Its algorithms help embed those ads directly on the app, and the way that they were able to compete, because you should automatically think, doesn't Google and Meta already do that with their various pieces of software and applications that control both the demand and the supply side, both the marketing relationship and the publisher relationship?"

Yeah, they do. But AppLovin was able to wiggle its way in there, and one of the ways they created their own flywheel or supply chain was early on, they actually started buying and developing their own mobile apps themselves.

So they understood early on the best way to actually compete with these big walled gardens was to, in a way, create your own walled garden in your own right.

Now, you probably know AppLovin sold its game studios to Tripledot in exchange for cash and a minority equity stake in that privately owned mobile game developer conglomerate last year in 2025.

So they're not a walled garden per se anymore. They don't have their own in-house flywheel, which is probably why they've been looking at developing some sort of social media app or some other platform to kind of get that back.

That's why they were talking about making a bid for TikTok and why there have been other conversations over the course of the last year that maybe they develop some competitor to Facebook or X, Twitter, something like that, so that they can get some control back and provide an outlet for their marketers, especially as they're starting to break out of just mobile game advertising, user acquisition, and now getting into direct-to-consumer brand advertising.

Shopify is a feeder. There's a Shopify integration where if you have an e-commerce store set up on Shopify, you can now utilize those same algorithms that helped make AppLovin's AI-powered algorithms so great for mobile game acquisition.

We'll see how that plays out, but one risk here is the higher level of competition as they get into e-commerce.

And how do they kind of walk down that relationship on both sides, on both the demand side, the marketing side, and the publisher side? And we're not gonna go into great detail in this video on this, but there's some other software companies in the middle that work on ad measurement, data management, and security. These companies actually have fared even worse in this environment.

But be aware that there are also some players here that you can take a look at in the future. No moats in software, only fast cars, and it's pretty easy to grab these analytics tools and just implement them in your own platform, be it DSP or SSP or especially the walled gardens. They can do it too.

So we've covered the business model of the walled gardens. We're now talking about AppLovin and how it fits into the digital advertising space.

What would be even more helpful to us is to understand this supply chain, flywheel, whatever you wanna call it. And we're gonna build out this supply chain using our new Build Your Custom Supply Chain tool over at chipstockinvestor.com.

Okay, so after looking at this supply chain, talking about these various areas of the supply chain and who's the real winner, the walled gardens, let's add a new group and add in AppLovin.

Let's call it mobile marketplace. Perfect. And we'll pull up the financials of this one as well. We're not gonna do a quarterly review. You probably know their revenue growth on a quarterly basis has dropped into the 50% range, and one of the big concerns is on a sequential basis, they've guided for mid 40% year-over-year revenue growth.

And we're gonna talk about here as they now move into e-commerce beyond just their little niche that they carved out in mobile gaming, can these profit margins, almost 70% free cash flow margin, operating margins approaching 80%. Is that going to last?

Also in our opinion, one of the reasons that the stock took a bit of a header after the Q2 report.

When you have margins like that, there's not a lot of room to go up, but there is plenty of room to go down. And part of this is they have to train new algorithms to address these new e-commerce customers here on the left, headed up by, let's just say Shopify, just for the sake of comparison, because a lot of the direct consumer companies, they would probably also forge their own independent relationship, and a lot of the smaller businesses maybe will just work through Shopify, smaller, non-publicly traded, even just, mom-and-pop shops, aspiring entrepreneurs, startups.

And on the supply side, I'm gonna leave this blank because this would be the mobile game ecosystem that AppLovin has developed. Like the minority stake they still hold in Tripledot, and we'll see how they develop the supply side of this chart.

But that is the question for AppLovin. Can they keep up the pace of growth? And are the profit margins going to take a hit as they do so? We're gonna click on AppLovin and go to the company analysis page. I'm gonna scroll down to the bottom to the Financials section of the Company page. Let's click on quarterly. This is the issue. You can see the trajectory of revenue growth.

And paired with that, what is the market worried about? These operating profit margins taking a hit simultaneously. Let me pull up EBITDA margin here rather than the operating margin. You can immediately see why the market is worried. If revenue growth is about to slow down, maybe even flatline, like AppLovin did a few years ago during the last bear market, advertising is actually a cyclical software end market, and the profit margins take a hit. This is why the stock has fallen.

It's not that AppLovin is necessarily doomed. This is going to come down to execution. Can they re-accelerate their revenue and keep profit margins high enough that value continues to get added for shareholders?

So this is what it boils down to at this point. Can AppLovin keep its revenue growing and will the profit margin cycle as they invest in e-commerce and train new AI algorithms for the placement of those direct-to-consumer e-commerce brands? Will those profit margins also stay elevated, or if they do go down, will they recover?

So if you've been following us for a while here at Chip Stock Investor, you know that we've been AppLovin shareholders for quite some time now. It's been a few years. We're very happy with having the stock in our portfolio. It's a pretty decent sized position in our portfolio, so personally we're not going to be adding even though the stock price has pulled back significantly. We have bought the dip a number of times in the last couple of years, it's grown to be a pretty decent sized position in our portfolio, so we're not adding personally at this time.

I guess maybe we should add here that this is kind of a classic mistake. When the stock price is doing well, everybody feels really confident about the business. They have so-called conviction, and then you see like the conviction calls wither and dry up after the stock price declines. If we had the room in our portfolio, I think we still actually have conviction in the business itself and management's ability in the past, based on their track record, to grow and expand the business over time and really do a fantastic job rewarding shareholders.

So the stock price alone isn't the concern, and if that is affecting your conviction in the business, do give this one a deeper look. There's no need to blow up the portfolio on something because really where we're at right now with AppLovin is they are in the midst of some sort of cycle. It could get more rough from here, and so we need to leave some room for reanalyzing the business and saying, "Hey, you know, it actually doesn't look like they're going to execute well this round."

But instead, just look at the risk to reward profile, which at the moment appears to be pretty decent, pretty good. If you liked it a couple months ago, it doesn't appear anything at the moment has changed other than the market just discounting the higher competition in e-com and the need for them to spend more money to grow into this new vertical. So if you liked it then, I don't see why you wouldn't like it now. But at the same time, let's be rational and right-size the position in the portfolio accordingly.