Learn how our new buy, AppLovin is perfectly pairing apps with users, fostering a cycle of growth.
As with any investment your capital is at risk
Over the past two decades, mobile apps have become integral to our lives. Today, over five million of them across the Apple App and Google Play Stores facilitate all manner of purchases, services and interactions - from the sharing of ideas to the monitoring of health and the access of entertainment. But with 80 per cent of all app downloads generated by just one per cent of developers, it is near impossible for the remainder of them to build a successful long-term business.
The stakes are high. Estimates predict that mobile app revenue will reach $750bn within the next three years. Enter AppLovin, a new holding in the LTGG portfolio. This company is dedicated to empowering app developers to succeed in a highly competitive market by matching the right apps with the right customers.
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How does AppLovin do this? Through targeted advertisements that “utilise machine learning to identify patterns across contextual signals.” Simple? Perhaps an analogy will help.
Think of the app market as a huge, bustling city with thousands of lemonade stands that each serve a slightly different twist on the beverage. AppLovin helps these stands to be noticed by showing ads to people who are most likely to be interested in trying their lemonade. AppLovin has found a smarter and more efficient way to connect lemonade stands with thirsty people. Importantly, every time a particular individual buys lemonade from a particular stand. AppLovin learns a little bit more about what different customers like. Over time, they use this information to achieve a cycle of continuous growth and improvement.
The company’s competitive advantage is rooted in a unique culture which fuels technological innovation. Founded in 2012 by Adam Foroughi, AppLovin initially focussed on the underserved area of performance advertising for mobile games.
Foroughi observed limitations within mobile advertising, ineffective performance marketing and soaring user acquisition costs and to address these challenges, he built a nimble organisation committed to data-driven decision-making, personalisation and continuous optimisation. In our lemonade stand example, imagine a tool that analyses factors such as time of day, weather conditions and even a customer's apparent mood to recommend a tailored lemonade stand. Adaptability transcends AppLovin and is built into product design with the emphasis on full-stack solutions with end-to-end control over their technology.
Through technological advantages that boost returns on developer input, AppLovin is a growing force in mobile advertising with an annualised revenue run rate of over $4bn, most of which comes through AppLovin’s AppDiscovery tool. We believe this is just the start. AppLovin can continue to increase market share and expand margins with its new proprietary Axon 2 platform. While the first version drove strong results, Axon 2 has taken performance to a whole new level. The rate at which advertising impressions are converted into App downloads has doubled from 0.5 per cent to one per cent. This is exciting as the revenue from increased conversion flows directly through to the bottom line generating returns to scale that are overlooked by the market at large.
For AppLovin to grow revenue 2.5x we only need conversion to rise another half percent or so. And to add a bit of further zest, there are two other areas of upside.
Firstly, AppLovin aspires to expand beyond mobile gaming apps into broader web-based advertising for e-commerce. Early pilots for e-commerce have shown promising results, potentially unlocking new revenue streams.
Secondly, AppLovin also has designs on becoming the infrastructure powering subscale competitors. There is great potential for them to start cannibalising a large chunk of Meta’s $160bn of advertising revenue here. AppLovin’s ability to leverage its technology for companies with under-monetised user bases, such as Snapchat, Pinterest, and Spotify highlights its potential to capture a larger share of the performance advertising market
The stock market has yet to fully appreciate the lock in potential of their technology and for as long as this remains the case, Foroughi will continue to deploy most of the prodigious free cash flow on buybacks which, in this case, makes a great deal of sense to us.
Our overarching view is that AppLovin is not just surviving but thriving in a world of increasingly differentiated lemonade stands that are all clamouring for attention.
| 2020 | 2021 | 2022 | 2023 | 2024 | |
| LTGG Composite | 102.9 | 25.9 | -48.8 | 19.9 | 39.1 |
| MSCI ACWI | 11.0 | 28.0 | -20.3 | 21.4 | 32.4 |
| 1 year | 5 years | 10 years | Since inception* | |
| LTGG Composite | 39.1 | 16.9 | 15.0 | 12.2 |
| MSCI ACWI | 32.3 | 12.7 | 9.9 | 8.6 |
*Inception date 29 February 2004.
Source: Baillie Gifford & Co and MSCI. US Dollars.
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