AppLovin (APP) Fell 38%. We're Not Selling — Here's Why

In 2026, three companies are on track to take around two-thirds of the total spend on digital advertising: Google, Meta, and Amazon. Digital advertising is heading towards a trillion-dollar market, and most of that is flowing through these closed systems that these three companies have. Yeah, the so-called walled gardens. The interesting question that we're gonna address in this video today is 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. Two and a half years ago. We've come a long way since we broke ground on this in 2023. 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? That's what we're gonna talk about today. And to do that, we need to start from the bottom. 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. And we're gonna build this out from two ends of the spectrum because I think at a high level, we're gonna talk about this in terms of a supply chain. You know, the buzzword in previous years was a flywheel. What's the flywheel when investing in an internet business, a digital ads based company? But, supply chain actually fits too. We can swap in flywheel for supply chain. It's better SEO or AI EO. Yeah. AEO. I guess SEO doesn't even matter anymore. Who cares about that? We're all about AI optimization now. So Kasey, I think we should probably just explain at a very high level that digital advertising, marketing is almost like the stock market itself. You have a buyer and you have a seller, and when they agree on a price in the middle, money changes hands and something of value exchanges hands. With the stock market or the bond market or whatever, it's a financial instrument. In digital advertising, it's an ad. An ad gets served to a user when companies behind the scenes come to an agreement. On the demand side, the company that wants to market, and the supply side, the company, usually a publishing company that has an advertising slot available. They come to an agreement, a sale is made, boom, you get an ad. And there's actually more than just those two parts. We're gonna break this down into five parts so that you can understand the digital advertising space as a whole. We refreshed these slides that we made from last year when we were talking about The Trade Desk and AppLovin. But as Nick said, there's a demand side and a sell side. We have that represented here. And all of those logos that you see, all these companies on this slide all participate in this, but the companies Google, Meta, Amazon are definitely the leaders in this. They have reinvented this because each of these companies built a self-serve ad platform where pretty much anybody with a credit card can buy ads in just a few minutes and set it up. And then they also have their own inventory. They have search results, YouTube, if you're Google or Alphabet, the Facebook feed, Instagram and Reels. So they're not renting space from anyone else, they're actually who own that. So they fit both sides of this platform, demand side and sell side. Yeah. It's a really powerful model. That's the old flywheel effect, if you've been investing since the 2010s. And one of the reasons why this has been such a smash hit for investors in the early days of the internet was not just because everything started headed towards digital format, internet format. You could track users across the internet, see what they were doing, what they were clicking on, cookies, track them with little, embedded digital code on their web browser. You could target demographics as a big brand, and because of all that, the value of a digital ad was worth a lot more than traditional formats: television, broadcast TV, cable TV, newspapers, billboards that you drive by on the freeway. All of that is harder to track, so migrating to digital ads unlocked more value. But even more than that, especially Google and Facebook early on helped really explode the amount of advertising happening from small and mid-size businesses. Maybe in the past if you were a small business, a local business, you advertised in your local newspaper or you advertised in the phone book. Does anybody else out there remember the phone book? Let alone buying an ad in the phone book? I think I've just aged myself. It's interesting though, to this day, the median-sized advertiser for Google and Facebook is probably a small business, but maybe in the past they spent tens or hundreds of dollars on advertising every month. Some of these companies can now spend thousands of dollars on advertising every month because they know who to target, and their audience is now much larger than just local. It might be nationwide, it might even be global. So the advertising market, thanks to the internet and digital technology, really just went crazy, and that was the early success of these businesses, and still the enduring success. We're going on three, four years now of the best use of AI, still probably digital advertising. In recent years, there's been a lot of companies that have gone to the ad tech side of things, trying to develop ways to either be on the left side of this chart as a DSP or on the right side of this chart as an SSP. Some of these names, of course, you'll recognize the Trade Desk, that was one that we liked, but had some real struggles recently. Adobe, Salesforce also on this DSP side. On the supply side, helping publishers, Roku, Magnite, PubMatic, Snapchat, even that one. Well, ultimately, all of this is to say this has been a little bit more of a volatile style of business. A lot of these companies have had a lot of boom and bust periods in especially their stock price. They in no way have had as much success as these walled gardens. Mm-hmm. Yeah, and many of them have also tried to emulate the walled garden business model, developing both a demand side and a supply side, but nothing nearly as robust as the walled gardens. Part of that also, missing piece of this, we talked about last week with the series with the CDNs and controlling the IT infrastructure itself, the walled gardens also control that. Huge benefit where not only are you controlling both sides of the digital ad ecosystem, but man, you also have control over your compute and the infrastructure itself in delivering the ad. That's the other part that's missing from these companies on this list as well. 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. So you'd be playing a game, there's a pause in the game, your eyeballs are looking at your phone screen, can't wait for that next level of Candy Crush, and you see an ad for another game, and you think, " Maybe I'd like to play that game." I need to download another game. Exactly. 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. Again, that's where Meta and Google and of course Amazon play very prominently. 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. Nick, let's start with Google. I think that's an excellent place to start, and we'll show you the financial features of this to see how you can pinpoint in any supply chain, flywheel, and we'll show you how you can use the financial features on this to pinpoint who's accruing the most value to themselves within a supply chain, a flywheel, an industry, whatever you wanna call it. So Kasey, you refreshed those slides showing the DSPs on the left, the demand side, the walled gardens in the middle, and the SSPs on the right representing publishers. You had mentioned we're gonna break this down in five parts. Here it is. I just made this template up really quick. I just fast-forwarded here and set up a new group of supply chain segments. Let's start with the two outside segments: brand companies on the left and media companies on the right. Just to help illustrate what's going on here and the relationship with the software and technology in the middle. Because really, these companies on the left, brand companies deserve their own separate analysis. You need to figure out the product, how they make the product, how they get it into the hands of customers. And on the right, media and entertainment, also different. You know, what's the quality of the content? How do they get it in front of people's eyeballs? How efficiently do they monetize it with ads and subscriptions and whatnot. So kind of a separate thing, but we wanna put them here anyways just to help illustrate the point. You picked these out. I get to pick the brand companies and the media companies. So let's go with McDonald's. I'm loving it. I see you called that consumer goods. Could also be called heart attack waiting to happen. And then Dutch Bros. The diabetic maker. The diabetes waiting to happen. And then on the right side, let's do Disney. I actually picked that one. Yeah. You hate Disney? As a media company, yes. Disneyland. You love it. I love it. And Comcast, NBC Universal. Fair. Okay. Take it away. Let's go left to right. Historically, a brand company is going to deal with the Mad Men. Like the TV show, like the big marketing agencies. The biggest one in the world, a company called Omnicom, just acquired a peer. Let's just look at the financials here. You'd have to dig into this a little bit more on an individual basis to know that the revenue is not actually growing 41% over the last 12 months. I think it's over 60% on a standalone quarterly basis. That's because of the big acquisition of Interpublic, IPG. But a big hint here, these pretty old businesses, marketing agencies, operating margins, mid, high single digits, free cash flow, low to mid-teens profit margin. Okay. Earmark that. And then also, in recent years, these marketing agencies will work with a DSP software technologist like The Trade Desk. In prior years, this was actually a much faster growing business, but notice how the revenue growth rate is starting to converge with the marketing agencies. We're in single digit revenue growth, if not year-over-year contraction now for The Trade Desk as they manage through some ad brand awareness marketing pullback. However, higher profit margins, at least as of right now on a GAAP operating basis and a free cash flow basis, some really healthy double-digit profitability. But let's compare that with Google. Let's compare the financials for Google, the big walled garden that controls both sides of this relationship. High revenue growth and really high profit margins. Of course, free cash flow margin down significantly. That's because they are building AI data centers like crazy. But, you can still get the idea here with the operating profit margin on a GAAP basis well over 30% off of a very massive and still fast-growing revenue base. Now on the supply side, there's some companies, SSPs, or it's oftentimes called yield management software. Let's just go with Magnite. These guys would typically be used by a publishing company or a media company to help manage their ad inventory and help them get the most bang for their buck. Similar thing going on here as with the demand side. Again, revenue growth has begun to converge with the industry average, the overall marketing and digital advertising market average. Operating margins and free cash flow margins are higher though. There is that, if you're looking at these companies, they have been able to drastically increase their profitability compared to some of the disasters that have been going on in media. Just by way of example, Disney, subpar operating and cash flow margins. All of this is to say the walled gardens in the middle have accrued so much power and sopped up so much of the money flowing through these relationships over the last two and a half decades. They are and continue to be the place where you would build out your portfolio, or at least start thinking about building out a portfolio here. 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? That's one of the questions, right? Exactly. 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. Obviously, we can't expect fifty percent plus revenue growth for forever, but it has started to taper off. 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? But you can immediately see a similar theme here with some of the other boom bust stories and companies that have never come back from a cycle down. They just busted and as of yet have not come back. It can be a really devastating combination. 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. But hopefully we've given you the information that you need to make a decision on whether or not this is a good buy the dip candidate for yourself and for your portfolio. 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. Compare it to other companies you may have in your portfolio, and I think this is why we always shy away with the conviction calls and instead just talk about allocating the capital across various companies. Try to find true diversification and then let the businesses duke it out and battle it out. 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." Maybe Unity is going to do better. Maybe the walled gardens are gonna figure out how to take back some of that mobile advertising market share. It could happen. Things change. Things change. 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. 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