AI Not Like Us! I’m not sure what AppLovin does - but I know how it got here

Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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Time for some controversy! Let’s talk about AppLovin - a $100B+ market cap Californian adtech which - you guessed it - is a rollup.   

Two weeks is a long time in public markets. Two weeks ago, I produced the first draft of this article. Life was easy: the stock had just hit an all-time high following a scorching set of results, pushing AppLovin’s market cap above $170B - on par with Booking.com and Uber. Then, the short sellers Fuzzy Panda and Culper Research moved in and set fire to AppLovin’s share price by poking holes in its business model and practices. 

The stock is 1/3 off ATH. The investment community is polarised a la Kendrick Lamar v. Drake. Now, I do not have a side in this “beef”. I don’t own the stock and I don't know whether AppLovin’s money machine is genuinely powered by the AXON 2.0 machine-learning algorithm (as the company alleges), or by “stealing Meta’s data” and loading up the unsuspecting users’ phones with spurious apps (as the shortsellers allege). What I DO know is that AppLovin’s stunning transformation from a struggling mobile game developer to an adtech money machine is a textbook case in M&A. 

Even after the recent slide, AppLovin shares are up 4x on the IPO price and up nearly 60x on the $2B that KKR paid for the business in 2018. And no, this isn’t a meme stock. In 2024, AppLovin produced $5B in revenue and $2B in free cash flow.

Below, we explain how AppLovin leveraged M&A to deliver a radical business model pivot. From being a content producer (mobile games) to an enabler (adtech stack). 

For your convenience, we split the narrative into 4 “acts”, each with a distinct strategic / M&A theme, plus an intro and an outro for ease of navigation:

• The Intro: What does AppLovin actually do? 

• The First Act: Assemble the vertically integrated offering for the mobile gaming franchise

• The Second Act: Diversify beyond gaming

• The Third Act: Go all-in on two growth opportunities

• The Fourth (and final) Act: Divest the gaming portfolio

• The Outro: What's up with the short sellers?

The Intro: What does AppLovin actually do? 

High level, AppLovin is a vertically integrated platform for mobile app marketing, monetisation, and measurement. Think of it as 3 separate businesses. 

One, the legacy mobile gaming (content) business - also known as “Apps”. A former money-spinner, it is in the process of being divested for around 3x EBITDA (more on that in Act 4). 

Two, software for third-party game developers. This is AppLovin’s growth engine. As the FT explained, the business model revolves around “serving pop-up ads to people who play mobile games. The ads themselves are for mobile games”. 

Three, advertising software for ecommerce and Connected TV (aka streaming platforms). This is Applovin’s least mature division, built up almost entirely through M&A. Some of the tech has been repurposed from the gaming division, notably the AXON machine learning algorithm. 

AXON’s first iteration was a recommendation engine. AXON 2.0 is a machine learning algorithm that matches advertisers and publishers and sits at the center of the flywheel that comprises software for marketing outreach (AppDiscovery); monetization efforts (MAX); and insights to enhance impression value (Adjust).

In other words, the hype around AppLovin chiefly stems from the assertion that its tech is so good it literally prints money for app developers who plough in to make even more money etc. This hypothesis has prompted some sell-sides analysts like the JP Morgan Credit Research team to call AppLovin “A true AI beneficiary, as its AI engine has created a highly effective flywheel for the ad platform”. 

So how did AppLovin metamorphosise from a mobile game shop into a flag-bearer of the AI revolution? Let’s find out! 

The First Act: Assemble a vertically integrated offering for the mobile gaming industry 

Let’s go back to 2018. KKR comes in. AppLovin embarks on a buy & build strategy centered on the mobile gaming vertical. Of the 15 acquisitions that AppLovin executed in 2018-21, the majority were content (studio) related. At the time of the IPO, AppLovin’s gaming portfolio comprised 200+ free-to-play mobile games across 12 studios. 

Why studios, though? After AppLovin’s network business was snubbed by competing game publishers, it turned to acquiring the customers (and their data) directly, through the games it owned. 

AppLovin’s “monthly active payers” - the gamers that made in-app purchases - peaked at 3,000,000 in 2021. That’s a lot of data to train the AXON algorithm, which kept getting better. By yielding precious consumer insights around game genres, ad types etc., AppLovin’s software allowed developers to de-risk new content launches. 

As Fitch Ratings put it:

Here too, AppLovin was quick to bulk up with add-ons like MAX in 2018 (an in-app bidding solution) and SafeDK in 2019 (a software development kit management tool that allows mobile app developers to automate security and brand safety). 

Lucrative as it is, flogging virtual goods was never the end game for AppLovin. It had set its sights on the entire mobile app marketing market by recreating the vertically integrated model it has pioneered in the gaming vertical. Game publishers were the big winners from COVID related lockdowns. AppLovin’s revenue from in-app purchases went from $54M in 2018, to $398M in 2019, to $740M in 2020. 

However, what comes up, must come down. 

As COVID lockdowns lifted, consumer spending shifted from virtual to tangible goods and services. Also, Apple tweaked its privacy policy to limit the ability of marketers to track user data without their permission. 

Suddenly mobile gaming didn’t seem so sexy anymore. How did AppLovin avoid annihilation? 

The Second Act: Diversify beyond gaming

AppLovin knew that, once plugged into the marketing flow in any mobile app vertical, by collecting valuable data, it would quickly identify areas for vertical integration. Thus, it would be able to re-create the model that had served it so well in mobile games.  

Predictably, more M&A followed.

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