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Could This Risk Impact AppLovin Stock in the Short Term?

By Jon Quast, Travis Hoium, and Danny Vena – Updated Nov 13, 2021 at 8:18AM

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Changes in the advertising technology industry could impact the value of AppLovin's recent acquisitions.

Mobile-app discovery platform AppLovin (APP 5.80%) went public in April. With a unique name and market-beating performance since its initial public offering (IPO), this is a stock undoubtedly on a lot of investors' radars.

In this video from Motley Fool Backstage Pass, recorded on Oct. 25, Fool contributor Jon Quast presents AppLovin to fellow contributors Danny Vena and Travis Hoium. One thing Jon notes is how the company has grown a lot via acquisitions, resulting in a lot of goodwill on its balance sheet. And that could be a short-term risk if it's ever forced to write some of that goodwill down.

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Danny Vena: Jon. We're we're down to our last ten minutes here, I'm going to turn it over to you so you can educate us about AppLovin.

Jon Quast: Yeah.

Vena: Tells us why you love AppLovin.

Quast: Well, maybe I should preface it that Udemy bringing that to the table because I really see potential in that, and we'll see what happens when it comes public, and that kind of valuation. But when it comes to AppLovin, this is a stock that I think it has a really unique name. I think that lands it on a lot of people's radars just in that alone. It's also beating the market since it came public here. Forty-three percent from IPO versus 10% for the market. It's delivering those returns right now. I think it's landed on a lot of people's radar.

For me, it's not something that I'm super excited about, but I do think that you should at least be aware of AppLovin, and what it does. AppLovin, what does it do? It gets apps of their customers downloaded, monetized, and analyzed, primarily video game apps. There's a reason for this. Video-game apps are actually the majority of the market when it comes to mobile apps, on both the [Alphabet] Google Play Store, and the App Store. That's what they're doing.

They have a library of first-party apps as well, and we'll talk about why this might be significant and it accounts for roughly half of their revenue right now.

Their mission is we grow the mobile app ecosystem by enabling the success of mobile developers. I'm just going to fly through this because we're running low on time. The financials here, 76% revenue compound annual growth rate (CAGR) from 2016-2020. Very high-growth company because this is a big mobile app's video games, this is a big emerging industry. They're one of the big players here. 2020 revenue, $1.45 billion up 46% year-over-year. They are doing even better now, revenue growth has accelerated in the first half of 2021 up 127% year-over-year. Gross margin is also improving. They are barely profitable but they are profitable, and they had 12% free-cash-flow margin in the most recent quarter.

AppLovin's Management CEO and Co-founder Adam Foroughi only age 40. This is a guy who could really grow with this company for a long time. Owns about 19% of shares, that is significant insider ownership here. You love to see that. High approval ratings on Glassdoor, you also love to see that. Keep in mind it is only 128 ratings there, but still you love to see it.

Valuation. This is a company that is very richly valued, it's 17 times trailing sales. It is growing fast and it has good margins. Where am I? You still see me?

Vena: Yeah.

Quast: Is it still sharing the screen?

Vena: I see you.

Travis Hoium: Not sharing right now.

Quast: Good, I did click out of that on purpose. This is a company that has grown, and this is one of the things that gives me pause with AppLovin. One of the things it gives me reason for caution here, is that they have grown very much so through acquisitions. This is an advertising technology company in many ways, and so the whole industry is consolidating right now. It's not uncommon to see these big acquisitions.

Prior to going public, they had spent over $1 billion in making 16 acquisitions in just the past two years. They have recently spent another $1 billion acquiring MoPub from Twitter. They're funding this primarily through senior notes, so they do have significant debt on the balance sheet. $1.7 billion plus $1.5 billion that they're raising now to buy MoPub as opposed to $1.2 billion in cash, so they do have good cash but they have over $1 billion in goodwill on their balance sheet as well as a result of those acquisitions.

I bring this up because in the environment that we're in a lot of questions regarding advertising technology, there's a chance that some of these businesses pull back and then they're forced to write down some of that goodwill on the books. It's something that could impact the stock in the short-term. Long-term, they're just going to need to continue to improve their software, make sure that they're keeping customers, and helping customers succeed.

Another thing that gives me pause is the fact that they've taken their software that is supposed to be used for their customers and said, "We can create our own first-party apps based on the data that we have." Well, that creates a potential conflict of interest. Now from AppLovin's perspective, it doesn't. They're saying we're creating our own apps to make our software better for our customers. That's how they are presenting it, it's possible that their customers don't feel the same way so we'll see in time.

This is a company that's on my radar. It's not one that I'm going out to buy today, but it is one that I'm getting to know.

Vena: Jon, let me ask, you mentioned the digital advertising space and we've been hearing a lot lately about the fact that Google is going to do away with cookies here in the near future. They're going to have their own solution inside their walled garden, but they're going to do away with ad-tracking cookies. You've got Apple who's doing away with the IDFA; the identifier for advertisers, and the information that they're sharing with ad tech companies. How do you think those are going to affect AppLovin?

Quast: It's going to be interesting to see Danny and I don't want to go over my head here, but one of the interesting things about AppLovin software is that it's building on the analytics that it has from the apps of its own customers. I'm not going to say there's not third-party data in there, but there's lots of first-party data that they have that isn't impacted by changes in IDFA and other things. They are able to continue to leverage their own data that they have whether that's from their own apps or from the apps of their customers. This is one of the advantages and why we're seeing these companies acquire other businesses. Why we're seeing consolidation because they're trying to gather as much first-party data as they can to counteract the changes of third-party data that's happening.

Vena: I think companies that have the ability to leverage their own internal data are probably going to have an advantage going forward.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Travis Hoium owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Twitter. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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