Episode 94 | Why AppLovin is Gaining Attention on Wall Street

In Episode 94 of Market News with Rodney Lake, Professor Lake, director of the GW Investment Institute, analyzes AppLovin, highlighting the company’s rapid growth in mobile advertising and expansion beyond gaming into e-commerce. AppLovin demonstrates exceptional financial metrics, including projected revenue growth above 40%, elite gross margins approaching 88%, net margins exceeding 60%, and strong free cash flow generation with minimal capital expenditures. Lake praises AppLovin for its scalable B2B advertising platform, founder-led management team, and shareholder-friendly capital allocation strategy led by CEO and co-founder Adam Foroughi. Lake also emphasizes the company’s high return on equity, manageable debt levels, low-risk balance sheet, and reasonable valuation, while stressing that the Institute’s research remains in its early stages.

Transcript

Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. This is a GW Investment Institute podcast. This is for entertainment and educational purposes only.

Disclaimer up front. We are here in the George Washington University School of Business. Duquès Hall, Duquès family studio, right here in the heart of Foggy Bottom. We are just in the first part of May here to date the episode, just so you know. But today we're going to talk about a specific company. Now, this is a little bit of a divergence because we don't currently own this company.

But this company has been in the news. I started following this company. So my analysis, let's say, is pretty early days on this company. But I wanted to share early what I'm what I'm thinking about now. This could go nowhere. This could go somewhere. Just to be super clear, we don't currently own this by the Investment Institute has popped up on some of our models in our quant class, so we'll have to see.

But we don't own it as of yet. Maybe we will, maybe we won't. But again, not investment advice, but I think it's an interesting company and some of the numbers really stuck out. So I thought, well, let's put it on the show, let's talk about it. Let's run it through the business, management, price valuation, balance sheet framework, BMPB.

That is the hallmark for the fundamental analysis portion of the GW Investment Institute. And we continue to systematize that. And our students put that to work this semester. And again we'll mention some of their ideas as we go here throughout the summer. Now what is this name of this company that putting in a little bit of suspense now, now it has a crazy name, which initially I would have to say was a little off putting for me because I thought, well, what is this company?

So what is it already? Well, the company's name is AppLovin ticker APP, app. They got a good ticker. Initially I was like, I really don't know what this company is and don't know what they do. Now, one of the things, even now, I'm starting to learn more and more about what they do. So again, this is an early days analysis for this company using the business management, price valuation and balance sheet GW Investment Institute framework.

So we're going to go over it. So what do they do. So and we'll get into some quick stats here. So this is an advertising platform initially started for the gaming. And now they're getting into other areas as well like e-commerce. So this is a platform for you know for advertising and for companies to get users particularly in mobile particularly gaming.

But they're expanding out and this is a platform.

Adam Foroughi is the CEO and founder co-founder of the company. And we'll talk about management. But this is an ad tech company that I had known little about. And I think it's just time to let's get acclimated again. We don't own the company currently, but let's get out there. Let's start to put some work into this.

So let's go over some stats. All right. So again ticker app we don't currently own this not investment advice. What's the market cap for this company $161 billion. So this is not a small company. So when you talk about okay well here's a company AppLovin which again has a kind of a crazy name, a fun name, but a crazy name.

And you know, something that I hadn't done a ton of work on. It's an ad tech company again for, you know, initially, especially for mobile and gaming. And now they're getting it in other areas to get users for advertising. So we'll have to see, you know, how this plays out. So when you talk about okay well 161 billion this is not a small company and this company is not that old.

So if we look at some other stats for the company. So let's get now into the business. So the B for the company we talked about the market cap obviously 160 billion approximately. But what's the revenue for this company? Well on the revenue side they have a fiscal year. That's a 12/31. So calendar year. So if you look at the, they're going to announce earnings tomorrow.

It is May 5th recording this one. So earnings will come out tomorrow. So we'll know more about that. All right. So the earnings or rather the revenue $5.8 billion on the revenue side. Now let's go over the revenue over the last couple of years especially as we start to learn about this company. So in 2022 2.8 billion, 23 again this is the calendar year and their fiscal year.

12/31 2023 3.2, 24 4.7. And then again, the 25 is the 5.8. So if you look at that, you know, these are very good numbers. And so for a company, you know, to be growing like this, if you look at the numbers 16%, 43% for the year over year, 23 to 24, 16% again for the 25 and then for the 24 to 5 46.

So these are these are you know, these are big numbers. This company has grown significantly. Now the projection, by the way, is that it's going to grow even more. So the to the December 31st, 2026. And that's what we care about right. The past obviously can be prolonged. It may not be but you don't you know you don't get to buy the company in the past.

You got to buy it today or by tomorrow, or think about where it's going to be in the future. So we care about what's happening going forward. So on the business side, revenue projected this year, 2026, to grow 46%. The consensus number is 8 billion. And then, by the way, grow another 30% for 27 fiscal year. 12/31/2027 10.4 billion, 29% growth from year over year.

These are these are obviously big growth numbers for a company that's already been maturing. And so we'll have to see. Time will tell, as we always say here. But these are big numbers. I think it's worth following this ad tech company. So now let's get into one of the things that we always talk about. Maybe not always always, but many times we talk about and certainly you want to talk about as an analyst on the business side, what are the gross and net margins?

So one of the things and a reason why I'm early days talking about this company is because the the net and gross margins for me were so outstanding, I thought, well, let's at least start doing some work on this company again. I had heard of the company. I had never done any real work. We haven't owned it in the past.

We don't currently own it. We may. We may own it in the future. Again, it has popped up on some quant models, gross margins, the current gross margin, or the most recent gross margin through 12/31, 86.5%. This puts the gross margin for AppLovin in the elite category. This is Visa. This is Nvidia. This is a category.

All right. This may be a one off. So we always say well let's look back. What has what are the gross margins been over the past several years. So go back to 22 gross margins 55% gross margins in 23 67, in 24 75. And then again. Excuse me 86. So. Not only are these gross margins outstanding, they've actually grown. And by the way, what's happening in the future because that's what we care about is analyst.

All right. We got to think about what's going to happen next year, in the year after that, if we're buying the company today, if we own the company today, we got to be thinking about not what has happened. Obviously, we try to understand where the company has come from, but what's going to happen in the future. The consensus gross margins for 20 full year 26, that's 12/31/2026, 88% and then dropping ever so slightly consensus to 87.9%.

Right. Again, these are elite margins for 2027. These are elite margins. And that margins have actually grown over time over since 2022 as the company has scaled up. All right. So now let's maybe it's all in the gross margin. There's not nothing left in the net margin. All right. Well let's check out the net margins. So the 2025 trailing 12 months for 1231 again that's their fiscal year 61%.

That's the that's the net margin. Then you go back. Let's go okay. Well 22 not so much. Right. So they're growing 3.7% then 11.6% in 23. Then 34 in 24, 65 or 61 for the last 12 months for 2025. So again these are elite net margins. Now again, what's the future? That's what we care about. 2026 you're talking estimated 65% net margins and again in 2027.

So these are these are fantastic obviously net margins as this company has scaled up. Now let's check out all right what's the free cash flow from this company. So this year 3.9 billion or rather excuse me for the 12/31 number next year 5.3. That's what we care about. So that, you know, these are good numbers. And so let's let's look at the CapEx there.

It's almost zero. They're investing like something like $5 million. So this is a company that doesn't require a lot of CapEx that continues to grow has high net and gross margins. So this is a that's why I thought, well, let's at least check this company out because some of the numbers seem so outstanding. And it's also been in the news recently as well.

The CEO has been on the podcast circuit as well. I encourage you to check some of those out, David Senra being one of them. So it's an interesting it's an interesting company and it has come up before. Again, the name seems a little crazy and I hadn't done really work on this company, but certainly this is not a new company and it's been in the news and people have known about it.

We just have not talked about it. And we don't currently own this company. But again, those are outstanding numbers. So when you go over, you know, when you're when you're looking at this and you're saying, okay, well what those numbers right. These elite net and gross margins and they're their business model really. It's a B2B advertising platform. It's not a B2C right now.

They're thinking about going into that. When you have these elite gross and net margins, and you don't have to put a lot of CapEx in here to grow the business. Those are fantastic. And you look at the growth rate in the revenue, you know, 70% year over year. These are big numbers. And so when you're talking about these numbers, you know, it's hard not to give the company a really good score here on the business.

So we're going to give a nine on the business right now. All right let's go on to management. So copper allocation they've been buying back shares. And again they don't have to put a lot of money into this. So the track record here they put a lot of money into into buybacks especially when the share price had dipped significantly.

Now this this stock has been very volatile for you. Foroughi is the CEO. Maybe I'm saying his name wrong. Sorry about that. I'll get it right at some point Adam F if you like that. Foroughi has been a fantastic capital allocator for buying back shares. And so when the company dipped they did a massive buyback. And he talked about this on one of the podcasts and the podcast about.

They also went as far as to buy the shares from the institutional private equity funds, particularly KKR, to make sure that you know it even out the, you know, the volatility for the market and certainly retired, not retired, but bought back shares from people who are likely going to sell those because, you know, private equity firms, they got to return money to their shareholders.

So really, you know, have to give high praise, at least for me. Again, not investment advice for that move. Again, just learning about this company, just learning about the CEO. So early days. But that is a good move and certainly good sentiment for for where to allocate capital. If the if the share price is really far down, you don't need a lot of CapEx budget and you have the opportunity to buy from people who are going to be selling anyway.

That's a very thoughtful, strategic move that is that he executed to the benefit of shareholders already. So I think that is a fantastic that aligns him significantly with shareholders. And if you look at the return on equity, I mean, you're talking, you know, big numbers 156%. These are fantastic numbers. So I think the aggressive buybacks really have a strong alignment with the shareholders.

So when you talk about management here you know also high praise. So another thing here is that he's a co-founder of this company. And so we like the operators and co-founders for the companies because they continue to, you know, operate the company. You know, beyond just being wealthy seemingly at this point he doesn't need any more money, and he's not driven only by the monetary gains that he has in the business, but he wants to build a big business.

So we like people who are founders and operators and have been able to scale the business. Not everybody can do that either. Jensen Wong would be an extreme version of that. Now, some of what has been said, a little bit like Jensen as far as relative to the hiring piece, apparently. I don't know if this is a you know, how how it exactly works, but still approving all hires of the company and really working on building in a team of a players at AppLovin.

So I think that's very interesting. On the management side, I think that's really worth paying attention to. And again, I'm early days on this company. We don't currently own it again. It's popped up. Never done any real work on this company until recently. So this is kind of a draft version that we're sharing early days for the Investment Institute and on the podcast.

So be clear about that. Again, not investment advice, but I think some of these things are interesting and I think they're definitely worth analyzing. And again, the CEO founder operator doing a great job already super wealthy. But the numbers keep scaling up right now. Again, if you go back on the business side and we talk about, okay, well, where do the numbers come from?

To. Right. Even for 2025, you talked about, you know, the gross margins had already got to to sorry in 2024 at 75%. And the next year you're talking about going to 88 in 2026 and staying at that number basically in 27. Meanwhile not putting any cap into the business, but yet growing revenue next year, 46% for the 2026, 12, 31 number and then another 30% after that.

Well, that's obviously a fantastic business. We have to do some work on pricing power here. We'll have to figure that out as we look at the business. So back to the management here. Again, very shareholder friendly owner, operator of the business co-founder fantastic job. Early days. Right. For a younger CEO to be so thoughtful about the repurchases here is a great sign.

And he's really thinking about alignment with shareholders and what how they can deploy the capital that's most meaningful to shareholders. What's the highest and best use of that capital, and how are they obviously maintaining growth for the business, but at the same time protecting and growing shareholder equity. Well great job. So on that again early days assessment. But a nine out of ten on that now price valuation.

This is a little bit of a different story. So this is going to be harder. The old school piece here is going to be a little bit more challenging. If you look at the forward PE it's 30 times. So this is not a crazy number. And especially when you when you think about the growth for the business.

And so when you when you say well you know, what's the what's the projected growth for revenue. Well revenue growth 46%, 30%. After that gross margin is 88% and net margins of 65%. Well, that 30 times does not sound ridiculous, certainly not compared to other companies. Now, how big can the company scale? What competitors does it have? It's early days.

We've got to work on all that stuff, but it's hard to give. You know, the valuation obviously, even a great number, but certainly it's hard to knock it down too much right now either before more work is being done. So I think the forward PE at 30 times not bad. The market cap, it's a big company for sure.

Already 160 billion, as I mentioned here as of May 2026. But I think you know let's give it a seven. So I don't think it's a crazy evaluation considering the growth metrics, considering the growth and net margins being in the elite category. So I think that's, you know, very good. And that puts it in the seven out of ten category.

Again. No it could be maybe a little bit lower. But for now we're going to go into seven. Maybe we could downgrade it to a six. But we'll leave it at seven right now. Again principally because on the valuation side 30 times. Not a crazy number when you have at least gross and net margins with no CapEx really needed to run the business.

That's fantastic. And so we're going to leave it at seven for now. All right. Business management price valuation. Next up is the balance sheet. So let's take a look at what's happening on the balance sheet side for this. All right. So what's happening on the balance sheet. So look this is not a ten out of ten cash and cash equivalents here for 12/31.

Just about 2.5 billion and 3.5 billion in, you know, the total debt. So you know, a billion in in net debt, not a big deal. Certainly not something that you would be overly concerned about. So one of the things that we think okay, well what's the interest coverage ratio for this company. Well and remember that's earnings before interest and taxes over interest expense 20 times.

So anything over ten we worry less about and certainly at 20 not concerned. And certainly when you talk about okay well this company generates free cash flow and doesn't need CapEx $1 billion on a $160 billion company. It's not something we're going to be overly concerned about and generating again last year, for the full year of 2025, almost 4 billion of free cash flow.

And so a billion in net debt, not a huge concern. Not a ten out of ten would like to see net cash really for this company to do acquisitions or other things. But they're aggressively buying shares back obviously at certain points. And so that's where some of that cash is going. So again tip of the cap as we mentioned on the management for that.

But that obviously has some impact on the balance sheet. You could have a higher rating on that balance sheet. So we're going to dig them a little bit on that. Not so severe. But I think it could be a little bit better you know holding a little more cash. So again net debt of about $1 billion. Not super concerned 20 times on the interest coverage ratio.

Very good there. So the risk profile here I would say is quite low. Not a ten out of ten. But we can give them an eight on this. Maybe you would give them a seven and a half to an eight and a half. So we'll settle in the neighborhood of eight overall. All right. So let's pull all this together.

Now remember you know, big disclaimer we don't currently own this company. It's popped up in the news. It's popped up on some of our quant models. It's been in the news for sure. It has a funny name AppLovin. Haven't done any real work on this before. And so this is my first really dive into this company. Major caveats included, but let's review business management, price valuation and balance sheet.

We gave it a nine on the management side or excuse me on the business side. Fantastic business. You know high and net gross margins you know elite category 150 return on equity. Fantastic adtech business doesn't need a lot of capital to run. That's a nine. Next up management owner operator buying shares back aggressively done a great job on the capital allocation side.

Really a stellar track record there Adam gets a nine for management again founder run business still approving hiring decisions really like that close to Jensen Wong's 40 people report to me type of setup very much in control. Very much on the front lines of the business. Really love that price valuation here. We you know 30 times forward earnings with these elite numbers.

You know not great not terrible. Gave it a seven out of ten on that. Moving on to the balance sheet. Net debt of $1 billion generating last year 4 billion of free cash flow. Not super concerned about this 20 times interest coverage ratio. So given that an eight if you wait those 25% each for the Investment Institute's framework, you get to it 8.25 really strong so far.

Again, early days. Just started working on AppLovin. Look forward to doing more work on AppLovin and if you have comments, we'd love to hear about your thoughts on AppLovin. Just getting started on the analysis for this business. We'll do another episode at some point in the future on AppLovin. Love to hear from you about this company and hear your thoughts.

That's it for now. For Market News with Rodney Lake. We'll see you back on the next episode.