Applovin (NASDAQ:APP) Surprises With Strong Q3, Gross Margin Improves

Full Report / November 10, 2021
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Mobile app advertising platform AppLovin (NASDAQ: APP) beat analyst expectations in Q3 FY2021 quarter, with revenue up 90.4% year on year to $726.9 million. Applovin made a GAAP profit of $142 thousand, improving on its loss of $89.9 million, in the same quarter last year.

Applovin (APP) Q3 FY2021 Highlights:

  • Revenue: $726.9 million vs analyst estimates of $697.8 million (4.17% beat)
  • EPS (GAAP): $0.00
  • Free cash flow of $122.9 million, up from negative free cash flow of $1.51 million in previous quarter
  • Gross Margin (GAAP): 65%, up from 57.2% same quarter last year

Co-founded by Adam Foroughi who was frustrated with not being able to find a good solution to market his own dating app, AppLovin (NASDAQ:APP) is a provider of marketing and monetization tools for mobile app developers and also operates a portfolio of mobile games.

AppLovin combines a mobile ad network, developer tools, and a portfolio of hundreds of free to play mobile games it has assembled through acquisitions and partnerships with game studios.

Today’s app developer journey has three key steps – make, market, and monetize. The ‘make’ step has never been easier, but developers still face key challenges in marketing and monetizing their apps. Because of the ease of creation, there are millions of apps on Apple and Google’s appstores, which creates discovery and marketing challenge for mobile app developers. A further issue is even after a user downloads an app, developers must compete for user engagement and screen time. Most mobile games rely on in-app purchases (IAPs) and in-game advertising for monetization, which present hurdles on how to price IAPs appropriately while navigating the mobile ad ecosystem is difficult for individual developers.

AppLovin solves for these issues through its unique business model. Originally a provider of marketing tools for mobile game developers, AppLovin altered its strategy in 2018 and began acquiring and partnering with game studios to launch its own mobile gaming apps. The data and insights generated from the hundreds of in-house mobile gaming apps generated a virtuous cycle which improved its marketing software’s pricing and advertising recommendations for its customers, enabling developers to improve their discovery, monetization, and engagement.

AppLovin benefits from human attention and consumption shifting to mobile devices, most notably in video games. This sea change in human behavior means businesses must use tools like AppLovin to advertise to consumers, acquire customers, and drive retention.

AppLovin’s competitors can be broken into two groups: mobile game developers and mobile ad networks. On the gaming side, rivals include Zynga (NASDAQ:ZNGA), Playtika (NASDAQ: PLTK), and Roblox (NYSE: RBLX). Competitors in its ad network business are The Trade Desk (NASDAQ: TTD) and Unity Software (NYSE:U).

Sales Growth

As you can see below, Applovin's revenue growth has been incredible over the last year, growing from quarterly revenue of $381.7 million, to $726.9 million.

Applovin Total Revenue

This was another standout quarter with the revenue up a splendid 90.4% year on year. But the growth did slow down a little compared to last quarter, as Applovin increased revenue by $58.1 million in Q3, compared to $64.9 million revenue add in Q2 2021. So while the growth is overall still impressive, we will be keeping an eye on the slowdown.

Analysts covering the company are expecting the revenues to grow 31.5% over the next twelve months, although estimates are likely to change post earnings.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Applovin's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 65% in Q3.

Applovin Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.65 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Key Takeaways from Applovin's Q3 Results

Sporting a market capitalization of $38.5 billion, more than $1.04 billion in cash and with positive free cash flow over the last twelve months, we're confident that Applovin has the resources it needs to pursue a high growth business strategy.

We were impressed by the exceptional revenue growth Applovin delivered this quarter. And we were also glad to see the improvement in gross margin. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company is up 3.69% on the results and currently trades at $99.5 per share.

Is Now The Time?

When considering Applovin, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Applovin is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its gross margins show its business model is much less lucrative than the best software businesses, the good news is its very efficient customer acquisition hints at the potential for strong profitability.

Applovin's price to sales ratio based on the next twelve months is 11.3x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Applovin doesn't trade at a completely unreasonable price point.

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