Doug O'Laughlin from Fabricated Knowledge on management incentives at $APP

Episode Summary

Executive Summary: The episode centers on a bullish thesis for AppLovin: a heavily beaten-up mobile adtech and gaming company whose core software business may be gaining share thanks to post-IDFA market changes, consolidation, and product launches like Axon. The discussion argues that aggressive executive compensation, buybacks, and strategic optionality may signal management’s confidence that the stock is undervalued despite governance risks and insider selling.

Main Topics: AppLovin’s Business Model and Segments: AppLovin operates two main businesses: a large portfolio of hyper-casual mobile games and an adtech software stack for mobile game developers, with mediation at the center of the thesis. Post-IDFA / ATT Market Reset: The speakers argue that Apple’s privacy changes reduced ad-targeting visibility, making mediation platforms more valuable because they receive the fullest bid-level data. Consolidation and Competitive Positioning: The market has consolidated into a duopoly-like structure between AppLovin and Unity/IronSource, with AppLovin viewed as having stronger execution and share gains. PSU Grant as a Signal: A highly aggressive performance stock unit package with a low vesting hurdle and very high upside is interpreted as a possible sign the board sees meaningful upside and wants to align management. Valuation, Buybacks, and Cash Flow: Despite a depressed share price, AppLovin is described as free-cash-flow generative, trading at a modest EBITDA multiple, and potentially undervalued relative to peers. Strategic Optionality and Product Levers: Potential catalysts include selling the games business, continuing to improve Axon, and benefiting from connected TV/Whirl and normalization in ad markets. Governance and Insider Behavior: The discussion highlights insider sales, limited buybacks in Q4, and concerns that the compensation structure may be too asymmetric in management’s favor.

Key Arguments: AppLovin’s mediation business has become more valuable post-IDFA because it sits closest to the auction data and can infer bid behavior better than fragmented demand-side bidders. The market may be underestimating AppLovin’s competitive position because it has continued to gain share, especially versus IronSource/Unity, and its software segment kept growing even in a difficult ad environment. The company’s business mix has shifted materially away from low-quality games toward higher-margin software, improving the economic profile of the overall enterprise. The aggressive PSU grant suggests the board believes the stock has substantial upside or that management needs renewed alignment after prior insider selling. AppLovin’s valuation looks undemanding relative to the quality of the software business and its cash generation, even after accounting for dilution and governance concerns. Management’s execution history on acquisitions and product rollouts (e.g., Mopub integration, Axon) supports the idea that future levers can drive upside. The games business is still a drag but may be stabilizing, and any sale or further right-sizing could unlock additional value. A normalization in digital ad rates and the end of the hardest IDFA comparisons could improve results even without major product changes.

Data Points: Stock price at time of discussion: $16 - Used as the current share price when discussing the PSU grant and valuation. Lowest PSU vesting price: $36 - First vesting hurdle for the new executive compensation package. Top PSU vesting price: $79 - Maximum hurdle in the new compensation package. Potential upside multiple in PSU: 3x to 5x - Speaker described the grant as requiring a roughly 3x move from the grant price, with up to about 5x at the top end. Share price decline from highs: 85% to 90% - Approximate drop from all-time highs to current levels. Mediation market share: ~60% - Heuristic estimate of AppLovin’s share in mediation. Software business EBITDA margin: ~70% - Described as around 70% EBITDA in the prior year, with future expectations near 65%-70%. Software business take rate: 20% to 25% - Estimated take rate for the software/mediation business. Buybacks in 2022: ~$340 million - Company repurchased just under $340 million of stock during 2022. Average buyback price: High $30s - Average repurchase price for 2022 buybacks. Cash balance: ~$1 billion - Management was noted as having a large cash balance on the balance sheet. Stock-based compensation: ~$200 million - Estimated stock comp in 2022, discussed as a deduction from adjusted EBITDA. Adjusted EBITDA: ~$1 billion - 2022 adjusted EBITDA cited for the company. Implied EBITDA after stock comp: ~$800 million - Rough estimate after subtracting stock comp from adjusted EBITDA. Software business revenue: ~$1.4 billion in 2023 - Compared with Trade Desk for scale context. Trade Desk revenue: ~$1.4 billion in 2022 - Used as a public comp, though the speaker said AppLovin should not be valued like Trade Desk. Market cap comparison: Trade Desk ~$40B vs AppLovin ~$6B - Illustrates how cheap AppLovin looked relative to Trade Desk. Potential PSU dilution: ~3% - Estimated dilution from the PSU package. Whirl/CTV target: $75 million - Mentioned as the 2022 estimate hit by the Whirl opportunity. Whirl earnout potential: Up to $600 million - Potential equity payout to founders if performance targets are hit. Games business revenue mix shift: From ~2/3 to ~3/4 software EBITDA mix - Described as the business shifting from games dominance toward software dominance. Mopub integration time: 5 months - AppLovin reportedly shut down and migrated Mopub quickly. Axon impact: ~90% to ~300% YoY revenue growth - Described as the immediate uplift after Axon launch in prior cycles. Google bidding availability for Max: Open beta to all applications - Referenced as a recent Google announcement relevant to mediation competition.

Pivotal Quotes: "the most exciting thing I'm working on" — Doug Laughlin: Doug describes his enthusiasm for the AppLovin thesis at the start of the conversation. "the only person who actually understands what is being bidden on and the prices for it is the supply side" — Doug Laughlin: Explaining why mediation players have a data advantage after ATT/IDFA changes. "they want to unbreak the broken IPO" — Doug Laughlin: Describing the purpose of the aggressive PSU grant and management incentives.

Implications: The conversation suggests AppLovin could re-rate if mediation share gains, Axon 2, ad-market normalization, and a games-business exit or stabilization all play out. But governance, insider selling, and compensation asymmetry remain key risks.