TIVP095 (Video): Applovin (APP): The 30-Bagger Down More Than Half w/ Kyle Grieve & Shawn O'Malley

23:43If you're a fundamental investor like me, you need financial data that actually keeps up with you. That's why me and my colleague Daniel Manka use Fiscal AI for every episode of the Intrinsic Value podcast. Fiscal AI is a modern financial data provider for global stocks, and we use their web-based terminal all the time in the show. It pairs a clean, modern interface with institutional great data, over 20 years of financial statements, plus company-specific segments and KPIs that I love digging into. You want Uber's gross bookings? It's there. You want to see Caspi's payment volumes? It's there.

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24:54Again, that's fiscal.ai slash T-I-V-P. And you'll find the link in the show notes as well. Hey folks, quick, but exciting update here on Saturday, September 19th, Daniel, Kyle, and myself will be hosting the Intrinsic Value Conference, New York City. This will be a full day of value investing talks, stock pitches, and panels in Midtown Manhattan as part of a bigger weekend with our Mastermind community from September 18th through the 20th. And we're hoping to make it something like ValueX and TED Talks combined. And so members of our Mastermind community, both the Inner Circle and our Intrinsic Value Mastermind, will have spots reserved at the conference as part of their membership for free, plus private community dinners on Friday and Saturday night and breakfast on Sunday.

25:44And for everyone else, there's two ways you can join us if you're interested. A general admission ticket gets you full access to the conference itself, a stock pitch presentation from Kyle and an intrinsic value portfolio with Daniel and me, plus guest speakers that we'll be announcing in the coming weeks. Or if you want the full experience, our VIP ticket package that gets you all day conference access, plus a seat at our Saturday night exclusive dinner with William Green and the rest of our inner circle community. And it will definitely be one of the more special evenings we host all year. So if you've ever wanted to spend a weekend talking shop with serious investors in the financial capital of the world, this is it.

26:27Find tickets in the full agenda at theintrinsicvalueconference.com. That's theintrinsicvalueconference.com. And if you'd rather join us as a member and get the conference plus the full weekend included, apply to the Intrinsic Value Mastermind at theinvestorspodcast.com slash mastermind dash application. All the links are in the show notes below. Hope to see you in New York. And so for AppLovin, how exactly do they earn revenue from facilitating these exchanges? I mean, I assume there's a spread between how much advertisers are willing to pay AppLovin on the Axon side, and then they can see how much publishers are willing to accept from the winning bid on the publisher side, but is there anything more to it?

27:14Yeah, you're essentially completely correct there, Sean. So AppLovin reports on a net basis. So they're considered an agent basically in the transaction rather than the principal, meaning that the revenue that you see on the income statement is actually already net of what they've paid out to publishers. Now, that's actually the more conservative accounting treatment, but it also means we can't directly observe this spread that AppLovin is capturing between advertisers and publishers. So this is kind of annoying because it would be nice to know what those numbers are, but they keep them proprietary.

27:43So you kind of have to take your best guess. So the general public estimates that I came across were somewhere in the 30 to 40 % range. Now, that estimate basically represents the difference between what an advertiser pays and then what the publisher receives. So let's say that we use$100 spent by the advertiser. The publisher is then getting$60 of that while AppLove and Pockets the remaining$40. Now, the thing that I find interesting about AppLovin is they theoretically could capture more of that spread over time without actually squeezing advertisers or the publishers. So if AppLovin can continue to better match each side of the transaction to give the best results to both parties, well, then advertisers would be more willing to pay a premium.

28:23And if they can find an advertiser willing to pay, let's say, a$20 CPM instead of a$13 CPM, well, then AppLovin gets to keep a piece of that difference. And so that's kind of the flywheel of this business, isn't it? Better matching creates more value, which lets AppLovin take a bigger spread or attract more publishers and advertisers that give some more data and then further improves their ability to do this matching. Precisely. So let me put a few numbers on it just so people understand the two sides of the platform and how much just scale there is already inside of it. So Max reaches up to 1.4 billion daily active users across more than 140 ,000 apps.

29:03And so that's kind of where they're getting the liquidity. And because it's a unified auction rather than a waterfall, every eligible bidder gets a shot at every one of those impressions. And the winner can also just come from anywhere. It's not just coming from app loving side of things. It's good to see that app loving seems to have protected itself well from that potential regulatory overhang that Google had to deal with. Yeah, I think it really is. And I know you're not a fan, Sean, of businesses that are highly regulated. And it appears that at least for now, AppLovin seems to be in a pretty safe spot.

29:37But I think the real advantage for AppLovin is just how Axon Ads Manager interplays with Max. So Axon takes the advertiser's budget and creative and figures out which publisher slots to put it in. And because it has this structural advantage of having access to data from Max, it gets a very, very rich data set to see how certain ads perform on Max. versus let's say using an off max platform. And as I discussed in this example earlier, max does a really, really good job of giving publishers the best possible deal, which is often a lot higher than the alternatives. So, you know, what it really comes down to is that flywheel that you just mentioned.

30:10If app loving is doing everything right, advertisers are going to be more than willing to continue paying app loving for more use of Axon simply because the impressions that they're going to get are going to be much more valuable on app loving versus an alternative since they just convert better. it makes a lot of sense that they can create value as a middleman here because we see agent intermediaries involved in a lot of two-sided industries from real estate which we mentioned earlier to digital advertising as we're talking about today but what you just described in the matching of advertisers and publishers also sounds very replicable to me which i i say knowing that it probably comes off as a bit naive but still what stops these giant advertising companies like Google or Meta from being able to come in and take over this market and do it better than Applovin?

31:02Yeah. So, you know, if I'm being honest, I think this is where Applovin starts to get a little tougher to understand, at least for someone like me. So like you just mentioned, I think it seems pretty straightforward given Applovin's product offering. And it makes sense from both an advertiser and publisher's perspective to use Applovin's products. But, you know, if Applovin can do this, well, what's stopping Google or Meta or Unity from just replicating the strategy? And why hasn't AppLovin taken even more of a market share than it already has? So unfortunately, AppLovin, they do have a number of competitors on both the advertising and publisher side.

31:34So Google, for instance, is a competitor on both sides of that competition as well. So Google has its Google AdMob product. This product just on the publisher side also uses a bidding process, they offer analytics, and they offer other automated tools. So the audience is learning quickly. This is why we decided to pass on the trade desk and why I still haven't opened a position in that stock despite it falling 75 % from the date we published it. From the date that we published our episode on it, from 2015 to 2025, it was the epitome of a compounder bro stock. And, you know, people would point to it and say, this company is going to keep growing up and to the right.

32:15And they're perfectly illustrate what quality growth is that they've never missed and earnings. And really, it seems like that turned out to be too good to be true based on just how dramatically this stock has fallen off now and the swing and narrative surrounding it. And so it's just really hard to get an advantage in the online advertising space because you do have these large tech behemoths like Google and Meta, and they have such a strong hold on the space that it makes it very difficult for competitors to establish any kind of meaningfully sized niche that they can protect and fend off competition from.

32:53At a$250 billion market cap at one point for Apple 11, they're certainly starting to reach that size where the niche that they dominate would be material to the economics of some of these big tech giants. Yeah, I mean, totally true. And even if we just avoid the big tech giants for a second year, we also have to take into account that there are smaller competitors out there as well that I think have carved out a pretty decently sized niche for themselves and they're just not really going away. And I think there must be a reason for that, right? I mean, there has to be. After all, if a business like AppLovin was such a bad business, well, then it probably wouldn't have been able to compound revenue at nearly 40 % with operating leverage on top of that.

33:35So what is it about AppLovin that has allowed it to become a somewhat durable business while kind of growing fast, expanding its ability to generate its margins, as well as just gushing cash? And I think to answer that, I think we first need to understand that AppLovin is done a pretty brilliant job of understanding its customers, which I definitely think is key to its competitive advantage that it now has. Now, earlier, I mentioned that AppLovin used to own a number of gaming companies that they eventually sold. Now, this actually wasn't done just because they wanted to get into the gaming industry.

34:08Frogey has actually said that he doesn't even like games. Yeah, I was wondering about this. I mean, it does seem strange to me that they had these gaming studios and then sold them off. And that didn't seem like a necessary set of assets for Apple Lovin to have. But I guess there's probably a good backstory here as to why they would have bought them in the first place. Yeah, there's definitely a good reason here. So they ended up buying these studios because in AppLovin's earlier days, they needed to basically gather data from their publishers. Now, when AppLovin was a younger company, they obviously didn't have access to the data that a business like, let's say, Meta would have from generating its own use of pixels, which are kind of this embedded piece of code that advertisers would use to generate analytics.

34:50Now, I remembered actually a long time ago, I briefly used Meta's ad platform and went through their process of setting up my own pixel to access data. Now, while that's great for advertisers and meta, this doesn't really do anything for a business like AppLovin, which obviously wouldn't have direct access to that data set to use on their own customers. So instead of just closing shop, they decided to just buy the studios themselves to generate their own data on the games that they controlled. And that would help allow them to see real-time performance on their own tools like Axon and Max. Now, this data also helped feed the recommendation engine, which obviously improved even more the targeting for advertisers and helped monetization for their own developers, not only including their company-owned studios, but also other companies that they were acting as an agent for.

35:37I think it's pretty similar to the idea of a strategic IP carve-out. And folks who have listened to this podcast for a while or who have followed me certainly know that I love to mention Uber. It's one of the companies that I'm most excited to be a shareholder of. And just continuing to invoke Uber whenever I can shamelessly, in 2020, the company acquired its rival in the Middle East, a company known as Kareem for$3.1 billion. And so Uber wanted access to Kareem's regional ride-hailing supply network to integrate into its own app, soaking up market share and then adding to Uber's scale advantages.

36:18But Kareem was not only a Middle Eastern ride-hailing app. It was something like a super app, maybe closer to a company like Caspi in Kazakhstan. And so it included other segments like grocery and fintech payments. And these segments were not only outside Uber's wheelhouse at the time, but were also losing money. So Uber carved out these assets by selling them for a few hundred million dollars, cleansing their balance sheet and allowing them to focus on what they do best. I just knew you'd fit Uber in there somehow. But I think that's a really, really good comparison. You know, Applovin ended up selling these gaming studios to Triple Dot in 2025 for a total value of about$800 million in cash and stock.

37:01And I think this really helped allow them to redeploy the capital into some higher margin parts of their own business. It also acted as an ability to help them focus more just on the advertising business and less on anything else that would distract them from that specific purpose. Now, the fact that they took a stake in TripleDot, I think, was also strategic. So it helps maintain the relationship between these studios and Macs while removing the need to deploy capital or time into the gaming industry. So since they got access to this data, I can only assume they've taken advantage of the ability to monetize it, which I'm sure has helped underpin these mind-boggling growth numbers that we've seen from the company.

37:40But maybe it's just because I find the space so confusing. I'm still not sold on Apple Levin's competitive advantages. And on the one hand, I think, yes, their success does suggest that they've carved out a niche clearly that Alphabet and Meta have not been able to consume. But on the other hand, the more they grow and prove that this can be a hugely profitable space for them to operate in, you have to wonder whether that will catch competitors' attention. And so I think just at a high level, this is a challenge that any dominant niche player faces as they scale up and start to step on the toes of the big boys.

38:18Oftentimes that's going to lead to a niche player getting acquired. But if an acquisition is too expensive for the acquirer, then competitors might try to build their own parallel businesses from scratch. And that would be a real problem for AppLovin. You're a hard man to sell, Sean, but I'm going to keep trying here. So using the story above, we can see that AppLovin has built its advantages over this multi-year time period, right? So even if a new entrant, let's say, comes in with billions of dollars to spend, and let's say they want to compete with AppLovin, it would still probably take quite a bit of time for them to reach the same level of scale that AppLovin has reached over this, you know, multi-year time period.

39:00So if I had to nail down a competitive advantage to just kind of one thing here, I'd probably go with scale economics and maybe this data learning flywheel. Now, on that second point, this comes more from a decade of building distribution, advertiser relationships, as well as machine based learning systems, which today generate an enormous stream of fresh data and feedback that they've been able to monetize. But these types of competitive advantages still, to be honest, kind of scare me because it's pretty obvious to me that there are other businesses that are out there that think they can replicate some of app love and success.

39:32For instance, Liftoff Mobile just went public in June of this year. And Legacy's Liftoff started primarily on the demand side. But after merging with this other company called Vungle in 2021, it now has both a demand side and as well as a supply side platform. So it's been building mobile ad technology for well over a decade and operates across both gaming and non-gaming apps. So I would definitely consider it to be a meaningful competitor. And then on the mediation side of competition, the real rival is probably Unity's level play. So one study that I found regarding that from 2025, they found that max is roughly about 55 % of ad monetized top grossing games versus about 25 % of Unity's level play and about 13 % for ad mobs.

40:18you know, they do have a pretty big market share. It would be fair to say, though, as we talked about earlier in the episode here with the court cases against Google, that Google's vertical integration across the ad stack has historically created some conflicts of interest. To put it mildly, AppLovin used to be more vertically integrated. So it owned a large portfolio of these mobile apps that provided first party data and audiences that helped them improve their own advertising technology. But now with that gone, in theory, that has allowed AppLovin to shift its focus entirely toward advertising.

40:56That divestiture reduced some of AppLovin's vertical integration. So it no longer operates the publishers whose inventory its platform also monetizes. So at least structurally, AppLovin is now less vertically integrated on the publisher side than it used to be. There are maybe fewer conflicts of interest, fewer potential red flags for regulators. And so that does not make AppLovin completely neutral. Its own advertising demand still competes inside of Max, but AppLovin says its demand receives no preferential treatment and that the highest bidder wins. And of course they say that, but I assume there's some truth to that.

41:37Yeah, I think Max is powerful because it sits in that mediation layer between the publishers and competing ad networks. So for every impression that's monetized through Max, Applevin is really sitting in the middle of that exact decision process. So eligible demand sources submit these real-time bids. Max compares those bids alongside any non-bidding demand source, and then they just determine which ad to serve. But Applevin also participates on the demand side of those auctions as well. So in effect, it operates the marketplace while competing within it. Applevin says its own demand receives no preferential treatment, like you just said, and that the highest bid wins.

42:12And as far as regulators are concerned, as far as I can tell, there's talking the truth on that front. So, you know, just kind of getting back to an example here, let's say Google can offer and already does offer a very similar mediation model through AdMob, while Meta supplies demand to third party publishers through the audience network. So, you know, the moat isn't necessarily that Google or Meta are technologically incapable of replicating Macs. I think the stronger question is probably whether AppLovin's scale in the publisher mediation gives it data, liquidity, optimization, and a distribution strategy that just becomes more and more difficult for competitors to try to overcome.

42:47I think it sounds like Meta and Google are competitors in some ways, but they aren't apples to apples competitors for the reasons we just discussed. And there was another thing that really blew me away when I was doing some of my own research to prep for AppLovin here. And that was that I wanted to speak to some of their competitive advantages and how lean of an operation it is. The EBITDA margins and EBITDA as a proxy for operating profit before debt financing costs and these other things. It's a more pure measure of the business's profitability. It's over 79 % over the last 12 months. And that just shows clearly it's an incredibly asset light business.

43:29There's not a lot that falls into the income statement that reduces their profitability, which is very good thing potentially for for shareholders and their ability to create value for shareholders over time. Yeah, the margin in this business are some of the best that I've ever seen. And there's another stat that also blew my mind. So if you look in the trailing 12 months, Applovin has an average revenue per employee of$7.6 million. And with profit margins of nearly 65%, profit per employee is also running into the multi-millions. Now, like most software companies, you can probably tell where much of this operating leverage is coming from.

44:06You know, they don't need too much incremental expense to scale up the number of advertisers and publishers that are already using their platform. So as they get more and more customers and they're spending more and more money, they get that massive operating leverage tailwind. Now, the other part of this is also, I think, embedded inside of their CEO, Adam Ferrogi. He mentioned that they have kept very, very lean completely on purpose. For instance, they limit the number of managers to ensure they aren't going through too many bureaucratic layers that can clearly impact margins. And I think that's a pretty good advantage over a competitor who thinks they could just hire, you know, 5 ,000 people to try and beat Apple Venn.

44:43Chances are their unit economics are going to be much worse than Apple Venn's, which I think helps Apple Venn's competitive position to some degree. And just as we were looking at this chart here for Apple Oven, there's been some huge volatility in their operating margins that I'm hoping you can maybe provide some context on. From 2022 to 2023, margins went from 17.7 % to almost 70%. That's a pretty big change in a 12-month period. And they have sustained those high margins and growing over the last couple of years. but yeah what really explains that massive jump in one year yeah so i think there's a couple of things that explain it so the first one that would explain some of that margin compression i think lines up with a couple of acquisitions that they made so mopub was probably one of their biggest which was i think for over 500 million dollars and this was actually a really really good use of capital as it added a lot of talent to to their staff but it also added some more gap expenses like depreciation and amortization.

45:48And then they added a couple other smaller acquisitions compared to Mopub that also would have increased their amortization expense there. And that also helped compress their margins for a time. But I think if we look at the other side of things and see, okay, well, what was it that caused them to expand instead of compress? I think one of the major developments was Axon 2. So I talked about the AppLub and Ads Manager. And so over time, they've had new iterations, new generations of that software. And I think it has made some major, major differences just in their ability to get more and more advertisers to use their product just because it's gotten better and better.

46:24And so this, I think, probably is what really, really helped them increase it. So it was a mixture of the Axon 2 model. And then I think also, you know, they haven't done too much in M &A over the last few years. So I think that's also helped keep them lean. And obviously, you know, when you're doing a merger and acquisition with a larger company, you have to bring in new staff. obviously that adds expenses and it can take some time to kind of figure out okay well who are the people that you really need to stay in the company that are you know giving you the most bang for the buck versus who can probably be removed and so that takes a little bit of time so you have a little bit of a lag period as well all right well i think uh listeners can probably feel my hesitancy about apple oven here um though you know you're definitely helping me appreciate the business much, much better.

47:11And really, I would say partly why I have a disposition to being somewhat critical is that we're trying to figure out why a business with a three-year revenue CAGR of 55%, I mean, just eye-popping growth, is trading at a really very modest valuation compared to the amount of growth and profitability that the business has been able to flex. And so at face value, it just doesn't seem to make sense. But as you can probably gather from our analysis so far, there are a lot of moving parts in a business like AppLovin. And I do think that it's imperative to feel like you understand all of them if you want to be an owner of the business.

47:50But even if we strip out the growth from this business just for the sake of a thought experiment, there's still another metric here that is sort of unbelievable, literally. This is the business's return on invested capital that I'm referring to. And if you go to Fiscal AI, which is one of our favorite tools to use, their ROIC, return on invested capital, is listed at 113 % for AFL-11. And that's actually a number that's been rising since the IPO. And yeah, it's another one of those that just sounds too good to be true. Yeah. And I think there's some hair in this business, which is why I think it has a, I'm not going to say depressed multiple, but a reasonable multiple.

48:34And we'll address that here shortly. But I think I do want to look a little more at that astronomical return investor capital number that you just mentioned, because when I saw it, it definitely caught my eye as well. So there's definitely a few things to consider here. So first, given that Applovin is a software business, they don't necessarily have massive reinvestment opportunities. This isn't Google who can invest hundreds of billions of dollars into a new AI infrastructure. But they've made some acquisitions in the past. And to be honest, that might be the best way for them to probably continue to deploy capital.

49:07But listen to this. So for the first half of 2026, Applovin spent$1.8 million in property, plant, and equipment on$3.8 billion in revenue. So it just doesn't really seem like management is interested in hiring a lot of people. The CompuPower that it does use is all rented. It's not owned. So there's no factories to build, there's no fiber to lay, and there's just not much working capital needed to run this business. It's your typical capitalite business that is generating a ton of free cash flow with minimal reinvestment needed. But I think all this also poses kind of a problem that we've seen in a business that we just looked at recently, such as like a Domino's pizza.

49:41So they also have triple figure returns on invested capital, but they run into the exact same issue of limited reinvestment opportunities. So even though AppLovin has that 100 % plus ROIC, it's not to assume that you'll get anywhere close to that number of returns because at a maximum, you know, AppLovin can probably reinvest somewhere around 500 million per year in incremental organic growth through things like R &D, CompuPower, Engineering Headcount, and maybe some other smaller internal initiatives. So, you know, even though that ROIC is high and it's great to see that it is a high number, just because there's this kind of lack of reinvestment opportunities, it's kind of harder to call Applovin a compounding engine.

50:19I mean, if we go back 10 years ago and looked at to where they've gotten now, I mean, it'd be clear that the answer is yes, it is. But now, I mean, it just gets really hard to see, okay, where are they going to reinvest and what kind of returns are they going to get on those reinvestments? Well, that's kind of the double-edged sword of software companies. If we've learned anything from this show and the companies we've researched, the good ones out there, the best software businesses, they'll have these extraordinary returns on capital numbers. But because the businesses are so capital light, meaning there's only so many ways that they can deploy cash into growing their existing business.

50:58They just don't have a lot of obvious places to put that capital back to work. And basically your ability to drive earnings growth and shareholder value and intrinsic value is the returns on capital that you generate and then what percentage of your earnings that you're able to reinvest. And so if you earn really, really high returns, but you have essentially no investment opportunities, then the business can still have very uninspiring top line and earnings growth. And so on the other hand, you could look at the hyperscalers and say that these were businesses that were very much capital light.

51:34But now they're taking this perspective of saying, I don't care about free cash flow at this point in time. And they're just pumping money into alternate business lines like AI data centers. And we're seeing businesses like Alphabet, Amazon, Microsoft, Meta, and Oracle too, doing this at really an unprecedented scale. And no one knows how these bets will pay off yet, but it's a huge gamble. And effectively, the capital intensity profile of these major tech companies that were once thought of as being very asset light, thinking more of like meta and alphabet there more so than Amazon, but still the capital intensity profile of these businesses has changed dramatically, which is just to say it takes a lot more money to sustain the business their current operations each year than perhaps it otherwise would have in the past.

52:25And again, this is sort of the challenge that App11 has, or at least my perception is that they have, is that they can generate really high returns in capital when they find opportunities to do so. And the question is, can they continue to find opportunities in their core circle of competency, or are they going to end up drifting into other areas of the market over time in pursuit of those same sort of returns only to end up misallocating capital? Yeah, and it's a really good question about the data center angle. I mean, they use data, so theoretically, would it make sense for them to go that way?

53:05I don't know. But I think given the rockiness of AppLevin's share price lately, it probably wouldn't be seen in such a good light if they were to kind of go in that direction. But I also think they have enough stuff on their plate as is. So going that route would probably act more as a distraction as we saw with the divestiture of the gaming studios. Not sure that that would be something that would be something that they would actually want to take on. But the point that I want to make here though is that Apple 11, I think, scores pretty much as high as possible on the returns on invested capital.

53:38But obviously when it comes to capital efficiency, that's not the only capital allocation decision that management has to make. There's also dividends and buybacks. We don't have to talk about dividends because they don't pay them, which I think makes complete sense. But I think where things get really interesting is on the buyback front. Yeah. And for listeners who are tuning into the show regularly, you're probably tired of hearing that both Kyle and I are not the biggest fans of dividends for tax purposes. We go on a tangent about why exactly that is. But that probably won't change until we reach our retirement years, which are a ways away off for the both of us, I think.

54:14But for now, we want to focus on business models that can maximize their investments in themselves, usually through intelligent reinvestment opportunities or through buybacks. Yeah. And you might think it's kind of weird for a tech business with these startup-like revenue growth numbers to be buying back shares. But to be honest, their buyback program has actually been incredibly value-accredited for shareholders, at least in their earlier years. So we can kind of separate the buybacks into these two different time periods. The first period spanned from about 2022 until 2024. And that's when the buybacks created a ton, a ton of value.

54:50So during this period, AppLevon spent about two and a half billion dollars to retire about 70 million shares. They did this with an average price somewhere around$35. Now the share price today, again, it's already had a 50 % haircut, is around 314. So obviously this was a huge, huge boost to shareholder value. Now, just looking at this first period, it's hard not to give Ferrogi and the management team an A plus for capital allocation. So in 2023 alone, they spent 1.4 billion buying back about 41 million shares. And today that stake is worth roughly$12.6 billion. But perhaps the best part of this back was that it also helped provide liquidity for one of their earlier investors without spooking the market.

55:30For instance, Apple oven bought a bunch of shares from KKR, one of its earlier investors. So that allowed them to bypass KKR, putting those shares onto the open market. So Apple was able to take them out and prevented panic from that kind of increased selling pressure that can happen pretty regularly. And they even actually during this period leveraged up a bit on some of the buybacks during this period to help increase the number of shares that they could repurchase, which I actually think is a pretty intelligent use of debt. I definitely have to give Faroe and the Apple Oven management team more broadly, I think, a round of applause because, yes, that is some really fine timing on the buybacks.

56:05And even though reliance on debt always raises concerns, given that this business generates a ton of cash, I mean, I can see why taking some debt out to really add rocket fuel to the buyback program could be a defensible decision. But you mentioned that there's a second part to the story. It doesn't sound nearly as good as the first. Yeah, that's correct. So by 2025, the stock had risen over 30 times since the start of the buyback program in 2022 at the stock's trough. But obviously they didn't bottom tick this by any means. But if you look at the chart since the beginning of 2025, well, the stock price is essentially round tripped going all the way up over past$700, but back down to, you know,$314 today.

56:45Now, what makes this kind of surprising though is that during this time, revenues and free cash flow have been compounding well above 40%. But during this period, the buybacks continued. Union. As of now, the average price was about$425 versus again, today's price of a little over 300. So this is where things are getting a little dicey. I think Buffett has said repeatedly that buying back shares make sense only when your shares are undervalued. And if I had to guess, management probably still thinks their shares are undervalued, but I think we probably need a little more time to see how this specific buyback program works out.

57:14If we come back, let's say in two years and shares are trading at 600 plus, well, then these buybacks will also be very value accretive. And this could theoretically happen if the business thinks it could just grow the top line at a 30 % kegger. While this is definitely a step down from their historical growth rates, it's still a very high number for a business with a market cap of$100 billion. I will say, though, that management, I think, has maybe been a little too willy-nilly on its buyback timing. So in that first period, there were times when they were buying back shares at, say, 10 times EBITDA, which is a very, very good price.

57:45But during the second period, they were going all the way up to 40 times. So I think that's a very large contrast in valuation there. And as an investor, you'd obviously much prefer that they keep that multiple as low as possible. Well, a good corollary of capital efficiency is debt, since it can be used to improve your returns if used intelligently. And given the intelligent use of debt, it seems, on those earlier buybacks, how about we take a closer look at Apple Evans' debt situation? What's your assessment of that? Yeah. And I think this is actually probably one of the biggest highlights of the business is basically, like I mentioned, it doesn't really require much debt to either grow or run the business for that matter.

58:26So as of the latest quarter, they have about$3.5 billion of long-term debt, but they're also sitting comfortably on$3.1 billion in cash and cash equivalents, taking net debt to just$400 million. And the debt they have are these long-term notes with a very reasonable interest rate maturing in a series of tranches all the way out for, you know, call another 25 years. So there's no giant wall of maturities that are coming due anytime soon. Now, you also got to put that up against what Applefin actually produces in cash flow. So just in the first half of 2026, they generate$2.1 billion in operating cash flow.

58:57So they could effectively just wipe out their net debt multiple times over with just a single half year's worth of cash flow generation. So, you know, as far as I can tell, there's really no red flags coming from debt. No, I think Applefin is clearly a very conservatively finance company. And since the business is capital light and doesn't require much capital beyond what they're able to reinvest in themselves, I don't think I would see much use for debt and the debt that they currently have. So that does beg the question, why even have it? And I think the answer lies mainly in two areas. One that we covered already in buybacks, they bought back 2.2 billion in shares just last year alone.

59:36So shares get depressed like they currently are having some dry powder to deploy beyond your current cash and the balance sheet can be a smart move. And the other rationale for why that we haven't really touched on is for M &A purposes. Yeah. So if there's a business like Apple Oven and they can acquire other businesses that also would have maybe some sort of capital efficiency numbers that are close to theirs at a current price, well then yes, it makes complete sense to go out and acquire those businesses. So since 2021, they spent about$2.8 billion on M &A. So this is a company that has experience in M &A.

1:00:09So I mentioned earlier their adjust segment. So this was a business that they basically bought completely outright. They also bought Mopub from Twitter, which I mentioned earlier, and then a CTV business, Whirl. Then in terms of creating the most value, that was probably Max. Max was basically bought a little earlier, so it doesn't actually count in that$2.8 billion spend. But the really important part was that Max was actually a tiny startup founded by one of Mopub's co-founders. So the Mopub acquisition essentially was just a way to help move some more talent back into max. But I think the biggest business that Applovin has tried to buy, which is probably the most interesting one, is TikTok US.

1:00:45So I think this was a very interesting proposition. And the fit probably made a lot of sense. You know, Applovin could leverage Axon on TikTok's massive user platform. That would help drive even greater advertising returns. But, you know, obviously we know with TikTok, there was a ton of regulatory scrutiny here. And it was actually very quietly removed from any further conversation from app-loving standpoint, as it experienced a ton of other rival bids and didn't end up winning. So TikTok US eventually was purchased by this consortium of other investors that are unrelated. In any decent business class, you're going to have a lecture on the history of corporate M &A and learn that generally it has not been a good thing for shareholders.

1:01:25Most deals have destroyed value or at least not lived up to expectations. And so would it be fair to say that Apple Evans' M &A history has been quite mixed in your perspective? I think that's pretty accurate. You know, Max was clearly a very good acquisition, but it's really impossible to actually even assess it as we don't know exactly how much value it's created for shareholders. But my assumption would be that it has been successful as it obviously opened the door for them having the ability to be a two-sided business and play both the supply side as well as the demand side. The studio investment, you know, doesn't look great at first glance.

1:02:01They sold it for about $400 million in cash, but were trained about a 20 % stake in TripleDot, the company that they ended up selling for. And in the last six months, their share of revenue from TripleDot has fell 27 % sequentially. So, you know, it's not a lot of data, but obviously that's not something you probably really want to see and something that mattered for M &A. And then one of their complete Flipflops was a business called Humans, which was a developer of a flip-flop social shopping app. They have basically fully impaired this investment, but it was also done for just$55 million. While this obviously was a mistake, it's at least not an investment that would have put the company in jeopardy if things didn't work out, which obviously it's gone that route.

1:02:40So they've had their share, I guess, of home runs in Max and then a couple of other ones that didn't work out. But at least in the things that didn't work out. The bet sizing, if you will, was low enough where the business is still running as it normally would, whether it made that acquisition or if it didn't. Yeah, well, you mentioned fully impairing their investment. What that means in plain English is that they wrote down the value of that investment, flip-flop. They wrote that down to zero. So that was obviously a swing and a miss. But I agree with what you said. It's a small bet. And if a management team was honestly only doing successful M &A, I would probably think that they're not reinvesting into enough opportunities and they're probably being too conservative.

1:03:27So probably overall, my impression is that the company's capital allocation is pretty average at best. I mean, it's something terrible, but it's something to write home about either. It really would not be, you know, sometimes with the rare company, you'll find that just management's ability to allocate capital on top of a sound underlying business can be a real reason to want to join in as a shareholder. In Apple Evans' case, I don't think the capital allocation is a factor that would pull us into wanting to own the stock unless we felt that the underlying business was really, really strong. And so to keep moving here as we break apart Apple Evans, how about we spend some time speaking specifically about Adam Ferrogi because he's clearly been the central figure at Apple Lovin.

1:04:16And with that, I assume you get some sort of key man risk. So how do you think about Ferrogi and his alignment with shareholder interests? Yeah. So insiders in total, in terms of interest, if we're looking at that, insiders in total own about 13 % of their class A shares, but they also have their class B shares, which are held just by insiders to give them voting power. The class B shares that Adam owns gives them about a 62 % voting rights. So with both those shares put together, Ferrogi himself has something like a 9 % economic stake in the business, which I think is a pretty nice amount of insider ownership for a business, let alone one that's$100 billion in market cap.

1:04:55Then when we move to salaries, they all seem pretty interesting, actually, to be honest. Basically, if you look at all the execs, they all took a base salary of$400 ,000. And this number has actually never been raised or changed since the business IPO'd, which means that most of the comp package is in the form of equity, albeit with no performance incentive attached to it. So another wrinkle is that they have no annual incentive plan, which you can argue at least keeps them more focused on the long term. But, you know, the 2023 proxy numbers make me feel definitely a little uneasy. So the summary compensation table shows that Froge earned over$83 million for the year with the chief technical officer at about$67 million.

1:05:34But it is also very important to note that that$83 million isn't actually cash that he pocketed. It's basically the grant date accounting value of a performance grant at that exact time, which could have technically been worth zero. The proxy set so outright with these amounts do not reflect compensation actually received. so the fact is actually kind of worse what he actually um ended up making was actually a far far higher number than that 83 million dollars oh it seems like a lot of compensation for for one year but i think we also need to to see why exactly he was paid that because if we look at the past few years it does seem to be an outlier so ferrogy was paid an average total comp of $12 million in the past two years.

1:06:18So that spike in 2023 had to be part of a former incentive plan. Is that right? That's exactly it. So it basically had this performance-based mega grant. Now, the details here are very interesting. So in March of 2023, the stock was ranging in kind of the mid-teens area. And the company was obviously very much out of favor with the market, kind of like right now, but somehow even worse. And so the company's shares had actually drawn down over 90%. Now, the board then decided they should give Ferrogi and Apple and CTO some performance units. So the way these were designed, they vested in about five equal tranches, but only if the stock hit certain milestones, which ranged between a 2x and 6x of the price that they were granted at over a five-year window.

1:07:03But incredibly, the shares bounced back super, super fast over just the next year or so. And so those five tranches basically had been achieved over consecutive quarters, which is why you saw this gigantic windfall. So the shares issues combined were about 17 million for 5 % dilution, which, you know, it's not the lowest number. But when you look at the long term chart of their shares outstanding, it really was just a very, very small blip. Well, from what I can tell now, it does seem like they have no performance based incentive for management. And I tend to like performance based incentives.

1:07:38And in a business set is clearly so focused on data. You would think that they'd have a ton of different metrics that could incentivize, manage on beyond just the share price. Yeah, it's a bit of a head scratcher for me too, but management is, you know, they've created a ton of value. The other thing I don't like about the incentive structure is that the shares that are issued are actually done each year, then fully vest each quarter, then are restructured the following year. I kind of feel like a longer vesting period would be much better for long-term alignment, but you know, at least the amounts are maxed out at a little over 12 million.

1:08:08So future dilution risk from those payments is very, very low, which I can appreciate. But to be honest, in terms of this incentive structure, I don't really like it. I'd probably give it something like a D. And that might seem overly punishing, but it's just not that inspiring to me. I'd much rather see a long-term incentive in place. I'd envision something like a margin target. Obviously, they've done really well on that. Maybe some sort of target on capital efficiency and maybe a free cashflow target. I think that would be a really, really good plan. And I think the company is already well aware of those metrics.

1:08:40And I think it would make a lot of sense to use that to help align management and shareholders going forward. Well, I agree with you there. And again, just to keep us moving along here, I think you know the types of risks that I like to try and think about much better after having done a number of episodes together for these past few months doing company breakdowns. And so I I don't think you'll be surprised at all that I would want to dig into regulation here in some more detail because the more you discuss this business and the fact it is involved in things like software apps and is associated in some way with Alphabet and Meta, my question is whether there are regulations that pose some type of risk to this company.

1:09:22Yeah. And I think this is a business that's involved with a bunch of other massive businesses that are also highly regulated. And as I mentioned earlier, you know, when AppLovin was considering just finding a buyer, it ultimately became a deal that regulators had to get involved with due to this Chinese involvement. So, you know, there definitely is some risk associated with this business. So as of the latest quarter, they also resolved a yearlong case with the SEC regarding its data collection practices. So the investigation was started because of, you guessed it, short seller reports alleging that AppLovin had violated its platform partner service agreements.

1:09:53So the reports were by Fuzzy Panda and Culper Research. And so basically the short reports were regarding other businesses like Apple, Google, and Meta. So the allegations were that they used unauthorized fingerprinting techniques to gather more data than they were actually permitted to collect. But as of the latest quarter, they said the inquiry was closed and that there was no recommended action. These kind of cases can be scary, especially when they're put forth by aggressive short sellers. And I've heard a lot of stories over the years about short sellers who are ultimately wrong, but they are incentivized to be correct because they profit from the stock going down.

1:10:27And that can make them do all sorts of things in an ethical gray zone, honestly. But there must be a little bit more to the story of why shares are currently down almost 60 % and down nearly 30 % from their Q2 earnings on August 5th. Which, when I looked at them, looked pretty decent at a high level. They had year-over-year increases in revenue of 53 % and profits growing at 55%. And so on the face of it, it does seem hard to justify why a business could retreat that much in price after what was otherwise a fairly strong quarter. That's right. And to your point on short sellers, I actually think they have a pretty good place in the investing ecosystem.

1:11:08They have a point of view that isn't consensus. And I think they also, unfortunately, may fabricate or sensationalize things at times. but they also uncover things that can end up hurting investors or their customers. So with all things said, you know, you kind of have to take what they say with a grain of salt and really dive into whether you agree with them or not. Or if you don't think you're capable of formulating an opinion, just because it would be time consuming, then you can just take that as a good signal to skip the name. But back to your point on the price drop. So I kind of agree with you.

1:11:36You know, it seems pretty strange to me as well. And since app loving wasn't a watchlist business, I just kind of had to dive headfirst into why this happened and see if I could make any sense of it. So I have a really, really good chat with an investor friend of mine who has been invested in this business for some time. And he had some really, really good points on why he thought this business had dropped. So I don't know if there's any one specific reason why the shares have dropped so much. It's probably from a number of different things. So I see three very strong possibilities that I think probably put the market on high alert.

1:12:05So the first one was a revenue miss versus the consensus. The second one was that the Q3 guide going forward decelerated down just a couple percentages. And then the third one was that they actually guided down on their margins as well. So to be honest, if I put myself into an app loving shareholders shoes, this would probably all put together, scare me a little bit. The revenue miss probably seems the least impactful to me. They missed projections by 20 million or 2%. So I placed very, very little weight on that. But I mean, the decelerating growth and decelerating margins is definitely something that I could see spooking in investors, you know, because you might think, okay, well, maybe this is a new normal and maybe they're going to continue to compress over the future.

1:12:47So while researching this business, there were a few other areas worth, I think, mentioning. The first was the opacity of their disclosures. It's very rare to see a technology company without an investor deck. While most investor decks, you know, I agree, probably tend to be some degree of over sensationalized nonsense. I also think that they can be quite helpful in just at least understanding a business at a very, very simple level. But Applovin has no investor deck, which I found very strange. No, it is. It is odd. And I like using investor decks to get a view on alignment with shareholders.

1:13:17And if an investor deck mentions adjusted EBITDA in every slide, there's a pretty good chance that when you look at the proxy, they're going to be incentivized on that figure. Yeah. I'm glad I'm not the only one with that conclusion. When I see an investor deck where they're mentioning figures like return on invested capital or return on equity, it always puts a smile on my face because I can assume and am usually correct that management is incentivized by that metric. Well, despite the opacity, what other risks do you see with this business? Yeah. I mean, it's probably my biggest apprehension and that's just based on the fact that it's core app loving is a good business because it has this kind of really, really good algorithm that requires constant improvement.

1:13:56But I don't know. There's just something I don't really like about that because it kind of feels to me like another business can just write a better algorithm and then poof, there goes your business model. And I think this is kind of part of the risk that ties right into AI risk, which is obviously a very, very hot topic in 2026. With how good developers are at using AI, who's to say that there's just not some other team of developers out there looking to compete with this company that can maybe better utilize AI and increase their output by a hundred times or a thousand times. You know, at least with AppLovin, I realize it's not that simple because obviously they have this proprietary data set.

1:14:31So in reality, even if a competitor could create a better algorithm because they can utilize AI maybe to a higher degree, the algo still probably wouldn't be as useful to them simply because they don't have the data set that AppLovin has already gathered here over the years. But, you know, I think I'll be transparent here and say I think it's next to impossible for me to really understand the kind of model data question with any real conviction. So I think that kind of disqualifies me from having the most valid opinion on this exact subject. But looking at another risk I do have an opinion on, it's simply that a business with these ridiculous growth rates capital efficiency and margin numbers, it's going to attract competition.

1:15:06I mean, yes, it has proprietary data, but you know, if another business wanted to go out there and build an algorithm, there's just not that much stopping them from doing so. And so the other thing is, you know, they already have a lot of competition. This is a really cutthroat business and there's really zero room to rest on your laurels. So, you know, I don't think AppLovin is doing that by any means, but it's nice to kind of have a business where the business is coming to you without having to just break your back trying to find new business constantly as well as fighting off very, very intelligent and well-financed competition.

1:15:36Yeah, that makes sense. But it feels like any business, any sort of technological edge today has to constantly be on its toes. At least when you're looking at a business like Google or Meta, they have the network effects of their platform to rely on. So you're not really betting exclusively on the strength of their algorithm, you sort of take it as an implied fact that they have very good algorithms and they've proven that over decades now at this point. And instead you're betting on, like I said, these things like network effects, which feel like for investors like us, much more digestible bets to make than truly tech focused bets.

1:16:16And it's sort of like how they say, Apple is not really a tech company. It's a consumer hardware company. It's that same sort of mindset of with Google and Meta, it sort of transcended just the algorithm. Whereas with AppLovin, they really are, it seems more like a technology bet where Google and Meta are basically more diversified business models. And that's what makes them such exceptional companies. Yeah. And I think that diversity is so key to it, right? Because I think with them, do they rely on an algorithm to some degree? Yes. But if their algorithm, maybe underperforms for a short period of time.

1:16:55They have so much diversity in other areas of the business. They're still going to be completely fine. Whereas with AppLovin, something might happen with its algorithm over a quarter or whatever. And then you get something happening right now where the market ends up panicking. So while I will say that I think AppLovin definitely has some advantages, they're just nowhere close to as robust if you're going to compare it to a company like Meta or Google. I think we can both completely agree on that. I think our listeners would agree too. So I just want to touch here on one more risk, which I think may have also been a major factor in the latest quarterly panic that we've seen.

1:17:27And this is that the business is potentially getting saturated in terms of generating volume. So as I mentioned a little bit earlier about their disclosures, it's kind of hard to get really meaningful data. But there are two valid data points that are useful. So we can get install volume and revenue. So we can see that in Q3 of 2024 a couple of years ago, install volume was plus 39%. So, you know, they were getting more and more volume there. but you know as of this year it's been negative in both quarters so it appears that install volume is you know moving in the wrong direction and just to be clear we actually we don't have any idea of knowing what the installed base actually is as they don't disclose it but they do tell us the volume of installations is going up or down on a quarterly basis and i think that's really really valid data to to look at so i think the fact that they're continuing to grow but with a declining volume at least means that they're making more money from other areas of the business you know e-commerce has been something they've highlighted on their latest call as being another growth engine.

1:18:21You know, this isn't a horrible problem to have, but if your volume continues to decrease, then, you know, there might come a point where you can't solve it with just increasing pricing alone. So if we look at numbers from Tengen, which specializes in marketing analytics, they claim that Apple have in command slightly less than about 40 % of the iOS ad monetization and user acquisition revenue for mobile games. The max mediation platform powers about 55 % of the top grossing games and over 73 % of the top mobile games. So, you know, as you can tell, they already have penetrated this market quite a bit, which further explains why they are seeking to diversify and get customers in other verticals.

1:18:56I think on the one hand, they've clearly penetrated the market well, and that gives them hopefully a long runway to continue monetizing that market share. But then on the other hand, having a large market share can ironically be a challenge for the kind of reasons you just discussed, right? If they can't take any more market share, volumes will dry up to some extent, forcing them to try and find volume growth elsewhere. So with all that said, now that we've looked at a few of the risks that worry you the most about this business, let's look at just how they're going to continue growing it. Because compounding revenue by 50 % year over year is no easy task.

1:19:32And that's sort of a high bar to set for yourself with investors. Yeah. And I think you're totally right over the pros and cons of having that high market share. Part of the reason I think AppLovin grew so much was that they were taking volume by increasing their market share. But now they, like you already said, they have to look for other ways to grow. So while I think Applovin is probably going to be a cash flowing machine for probably many years into the future, I think investors are clearly much more concerned with the growth aspect of Applovin. So one way that they've diversified is by creating actually an entirely new social media app called GIST from complete scratch.

1:20:08So I don't think Adam Ferrogi intends for this to be the next Instagram or TikTok by any means. And frankly, he doesn't really need it to be in order to get what he wants from it. My guess is that Gist is something that he can use similar to how he own those mobile game studios. You know, just buy the end product that the users are actually using. You gather data from the platform and you monetize that data to further improve their algorithm. What makes sense. And since much of the development and R &D flows through their cost of goods sold, we don't know how much they've spent on creating Gist, but if it can help them eke out growth for a few more years by continuing to improve their matching abilities.

1:20:44And it seems like it'd be worth a fairly large investment. Yeah. And given that app loving isn't really a social media business, I would have pretty low conviction that the scale's up to be anything too big, but they did a fine job with the gaming studios in front of what I've seen just has been pretty well reviewed. It was a pretty interesting initiative because there wasn't some sort of ground announcement. I actually found it through my friend who did some online sleuthing. It's a little odd that they wouldn't have discussed it, but I guess it's kind of echoing the ongoing theme of AppLummin's limited disclosures.

1:21:12It seems super speculative at this point, but I could see a world where they can somewhat scale gists and get the data they want out of it. And that could add to their growth runways. But again, with how little information we have, it's just really hard to have a lot of conviction in that idea. Yeah, totally. Now, another growth lever for AppLummin is in e-commerce. So this has been a strong growth lever so far with that industry growing about 28 % in the latest quarter over the holiday peak, despite it actually being a traditionally more weaker quarter. But, you know, it also kind of creates another problem, which is like just it's not directly in AppLovin's wheelhouse.

1:21:47So for instance, when AppLovin shows an ad in a mobile game, it tends to last, let's call it 15 to 30 seconds. But advertisers for, let's say, a small and medium sized e-commerce business, they tend to use static images or dynamic product catalogs as these are often built specifically for ads on Meta or Google. So, you know, with that said, it might take some time for them to optimize the ads in this segment for something specifically like a mobile game. You know, the format would need to change. And in order for this to be a viable market, that gap would be to eventually close. And so there's kind of this looming question, which is are small and medium sized businesses willing to change how they advertise?

1:22:21And if they think they can get a better return on ad spend using Axon, well, then they might go that way. But it still creates some friction on their end and producing ads that are optimized specifically for Macs and for mobile games. I think it's nice to see the business having multiple growth levers, but I know Apple 11 is very much reliant on its Axon model. And if the model provides advertisers the best prices on ad spend, of course, they're going to prefer that over alternatives. But the other issue with that is that since they are constantly updating the algorithm, you can get periods where it will underperform, which according to management is sort of what it sounds like just happened in the latest quarter.

1:22:59So theoretically, if they ship an update right after Q2 and the model delivers a higher return on ad spending, they could see a meaningful uplift in their revenue numbers for the next quarter and beyond. Yeah, I think that's part of the business that you can probably perceive as being both a positive and a negative. It's a positive in that the algorithm is obviously creating a much more efficient product for their advertisers, but it's also negative because if the model falls behind a competitor or if the update cadence is off, well then, you know, you get numbers like they had in the last one.

1:23:28So the other two growth drivers I'd like to mention here are the expansion of the supply side platform. So the three Ferrogi as mentioned are non-gaming apps, then you got the open web, and then you got connected TV. Right now, you know, this doesn't seem to be a huge priority and there hasn't really been a timeline given on it. So, you know, it's worth watching, but right now it seems to be a very, very low priority. And then, you know, there's the take rate. So I mentioned earlier that the price that advertisers pay isn't actually what the developer of the ad slot gets because AppLovin is getting a cut in between that number.

1:24:00So again, we don't know what the number is. And it's worth being clear that we can't know it from the filings. And I doubt we'll ever know it in the future unless you have some sort of insider information. So AppLovin books revenue as an agent net of what it pays publishers. So the gross dollar never actually appears. There's no gross billing line. There's no publisher payout line. And the revenue breakdown is by geography only. So you can't even separate Max from the actual ad platform. So again, the guess in that 30 to 40 % range, it's a guess, but it's not something that I can actually source from AppLovin.

1:24:31Now, the one thing that management volunteered this quarter was that Max Marketplace grew double digits sequentially, while AppLovin's own net revenue grew only 4.4%. So it's tempting to read that as AppLovin taking more, but it actually points the other way. So if publishers dollars are growing faster than Applovin's, Applovin is actually capturing less of the pool. And I'd be cautious even about that because Max is a marketplace carrying Meta's demand, Google's demand, Unity's demand along with Applovin's own. So publisher earnings can definitely grow faster just because competitors are bidding harder into Max.

1:25:05And I'd say that's more of a competitive intensity signal rather than a take rate signal. So Ferrogi offered it as proof that the gaming category is healthy, and it may well be, but it really tells us nothing about the cut. This would be great to have more data on, but it's really hard to say given their murky disclosures. Well, it's been a long one today, folks, and I think now is as good a time as ever to get to our estimate of AppLovin's intrinsic value. So I'll let you take it away, Kyle. Yeah, so I'll start off by saying that AppLovin is a pretty interesting business. For a business to be growing as fast as it is and trading at a cheap price is very, very rare in the markets.

1:25:40But it happens sometimes. And if you find that the market is completely wrong on the business, well, then you can make a very, very tidy profit. So for my base case, I assume that the business continues to compound its revenue at a little bit below about 17%. This does mean that revenue continues to decelerate, which as we've seen, the market does not like. And this is incredibly conservative as management is guided for about 47 % growth in the short term. But I'm going out five years here and I'm assuming that volume continues to go down and that e-commerce and just provide a very, very minor lift, if any.

1:26:08I assume that its EBITDA margins stop expanding and stick around that kind of 77 % range, which is a few percentage points below the last 12 months. The small fade comes from maybe compute making a larger portion of revenue and stock-based compensation as a percentage of revenue increasing slightly as well as more competition for their max product. And then finally, I'm just applying about a 13 times EB to EBITDA multiple, which bakes in an additional re-rating downwards as growth numbers continue to slow down. This is obviously a pretty big step down from its 19 times that it's trading at now, but I think it's in line with kind of the bottoming of their multiples when shares were very much out of favor previously, which is an outcome that I believe to be pretty probable in the future.

1:26:48So with those assumptions and a 30 % margin of safety, accounting for just the massive amount of volatility in this business, I get a price of about$480, which offers a 9 % kegger. And by the way, if you want to play around with a model, you can find it linked in our show notes below. And you can also sign up to our free intrinsic value newsletter at theinvestorspodcast.com to get deeper dives into the companies that we cover on the podcast. And we'll have the link to sign up for the newsletter also in the show notes. But yeah, where does that leave you on the business today, Cal, in terms of an investment perspective and whether we should add it to our intrinsic value portfolio?

1:27:23Yeah, my thoughts on this business are that it's a pass if I'm putting it shortly. I think while the business certainly offers a lot of upside, I think there's a path to achieving mid-teens return or maybe even into the 20s under very conservative assumptions. But I just don't think I could find myself really ever getting comfortable enough with the business to ever have it in the intrinsic value portfolio or my personal account either. You know, there's some real hurdles for them to continue growing. And I've been burned by businesses with high growth rates that I assumed would slowly fade, only to see the growth rate halt to a complete standstill.

1:27:54And the multiple compression was incredibly painful. So, you know, it's just an experience I prefer to not have to repeat. And part of the reason that I made this mistake was probably in not fully understanding the business as well as I should have to make that investment in the first place. And I actually get a very similar feeling with this one as well. You know, if this business does well, it's one of those situations where I will definitely give a round of applause to shareholders, but I just have zero regrets being on the sidelines. I think there are other businesses that I've covered that just make so much more sense to me and where the outcome in a few years time is just much more visible to me.

1:28:26You know, businesses with a completely different business model to AppLovin, like a Lifco or Wise, they just seem like businesses to me where maybe they don't have the same upside as AppLovin. But the base case is just so much easier for me to understand, which is why they're in the Intrinsic Valley portfolio and AppLovin isn't. Yeah, exactly. I just personally think this one is too hard for me. smarter people than me may feel like they understand the nuances of the programmatic advertising industry to have a lot of conviction and buying into app love and after the recent sell-off but we've mentioned trade desk a few times today and it really has become our go-to example of why you should stay in your circle of competence because several points along the way in the last year i've had folks reach out and ask why am i not buying shares in the company after a 40 decline and 50 decline and 60 decline and it's just kept going on and on and on and the stock has just kept falling.

1:29:18To be completely honest, I don't really know why because I never understood the business all that well in the first place. So is it a buying opportunity? Is it a value trap? I have no idea. And the great thing about investing is that you can choose which pitches to swing at, which is another thing we like to say frequently on this show. And for the trade desk and app loving, I'm very content with sitting on the sidelines. If this is the bottom in those stocks, then oh well, what we'll get to watch is they rocket upward, but I won't have any FOMO. I only have FOMO when I miss an investment that I felt like I should have been able to understand.

1:29:54And in this case, I just don't feel that way at all. And Buffett and Munger famously missed Google and they managed to still do pretty well. So you can afford to miss on a lot of big successes. A lot of stocks can do very well without meaning that you won't be able to do well. But what you can't do is you can't afford to make big mistakes on businesses that you don't understand. Exactly. And I think you'll continue to see us having our fair share of wins and losses on businesses that we don't even end up owning, you know, seeing as we are looking at so many businesses. So, you know, I think when it comes to modeling, we have to take into account not only price, but also just how comfortable we are with our understanding of the business.

1:30:31You know, I've heard some value investors say that there's no business that is ever just a no, because if it's cheap enough, well, then you can always find some way to justify owning it. But personally, I don't think I'm actually on board with that statement. If I lack the ability to understand the business well enough, unless I'm basically getting it for zero, then I'm just going to be making a mistake of omission and I'm just going to take a pass. So that's all we have for you today. But as per usual, before we sign off, I'd like to leave you with a quote, this one by Applovin CEO, Adam Ferrogi.

1:30:58I never believed in saving for cash on a rainy day. I feel like I'm a big believer in what we're building. I believe in where we're going. So if I believe in the future and we're a really high cash generating business, we should always be buying back our shares. I think this is a great quote. And I think Adam has done a pretty good job with his buyback so far. We'll have to check in over the next few years and see how the latest rounds of buybacks do. But if the business continues to grow, my guess is they will be seen in a good light as well. That's all for now. And I'll see you next time. Just a quick note before you go, this episode would not be possible without our friends at Fiscal AI.

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1:33:25Thank you.