When ChatGPT started the AI era, many analysts were unsure where the AI profits would accumulate. It quickly became clear that to power AI, we need extremely powerful computer chips, and a boatload of them.
In just a span of a few years, this AI-driven demand enabled Nvidia to become the world’s most valuable company with a $5.3T market cap.
Now, AppLovin is demonstrating that AI-powered advertising is next in line for those juicy AI profits!
The company operates an advertising platform that uses its AI to build, target, manage, and analyze advertising campaigns across mobile apps and connected TVs. The company has been highly successful in the mobile video game market, becoming the dominant ad platform for the global $176B mobile video game industry.
This approach has turbocharged their business, with sales growing by 142% from 2022, whilst FCF exploded by 10x.
Despite this stellar financial performance, the stock is down 51% in 2026.
This collapse was driven by key factors such as:
1. Short reports.
2. SEC investigation.
3. Skepticism regarding the expansion outside its core mobile video game market.
In this AppLovin Deep Dive, I will explain to you their business model and analyze all of 3 of these issues.
Most importantly, I will conclude with a 2030 Valuation Model to see what kind of returns investors could receive from owning this business.
1. Business Model
2. Short Seller Reports
3. SEC Investigation
4. The Opportunity
5. Q2 2026 Results
6. Valuation
7. Valuation Model
8. Conclusion
1. Business Model
As their name would suggest, AppLovin focuses on mobile applications. Originally, the company was building a mobile-based video game business in parallel to its advertising efforts.
In the above picture from their December 2021 Investor Presentation, we see the three pillars of their business model.
AppLovin Apps – Mobile video games that generated first-party data for their algorithms to analyze and were a venue to test advertising and analytics software.
Analytics – Mobile marketing analytics platform that fueled their recommendation engine. Tracks user activity and ad performance across apps.
AppDiscovery – Their marketing distribution platform that was used to run, test, and optimize advertisement campaigns and monetize mobile applications.
Back then, AI was still called machine learning, so AppLovin is a pioneer in this space.
However, in the last few years, the company has undergone a pivot and strategic realignment to focus on more profitable and faster-growing areas of its business.
Last year, they sold the mobile video game business for $900M to focus exclusively on advertising!
Let’s look at the remaining business and how AppLovin makes money.
1.1. AppDiscovery
Since businesses have existed, they have always wanted to have more customers. It is simply not enough to have a great product or service, as if nobody knows about it, there won’t be any sales.
For this reason, businesses spend significant sums paying to get attention for their business. However, it is not as easy as simply throwing money at advertising and hoping customers will just come.
There is a famous saying in advertising that goes something like this:
“Half the money I spend on advertising is wasted, the trouble is, I don’t know which half”.
While the advertising market has completely transformed in the last 100 years, this truth hasn’t changed.
Well, AppLovin is using AI to maybe finally change that!
AppDiscovery is their AI-based advertising engine that is central to AppLovin’s growth strategy. The company has built a suite of features that help advertisers make a higher return from their mobile app advertisements.
Here is how it works:
Their AXON AI engine uses AI models trained on billions of anonymized device interactions to find the right place for clients’ ads to maximise conversions. This service carefully analyses the advertised app and then uses AXON’s predictive AI to help advertisers find users who are most likely to download that app.
They use AI models to analyse user behaviour and predict what type of apps or services the user would like. This enables AppLovin to estimate user lifetime value and better assess potential retention. This information is extremely valuable as it helps to find the answer to that crucial advertising dilemma of not knowing “which half of my advertising is wasted”.
This is directly reflected in how customers pay for AppLovin’s services. Instead of paying a fixed price per view, click, or conversion, advertisers are charged dynamically based on the revenue they receive from the users they acquire.
The system enables advertisers to set return on ad spend (ROAS) or cost per install (CPI) targets and automatically adjusts bids, targeting strategies, and ad types to reach these targets.
AppLovin’s AI estimates conversion probability and then buys inventory at one price while charging advertisers another price. The spread between the two is AppLovin’s revenue. Furthermore, if I understand correctly, per AppLovin’s policy, there are no contractual limits to this spread. This means that the better AppLovin’s AI gets, the higher the spread potentially could get.
Because AppLovin captures the spread rather than a flat service fee, its effective take-rate on advertiser spend is higher than other demand-side platforms.
With estimates ranging between 30% and 45%.
However, very large mobile publishers and studios negotiating custom enterprise agreements may negotiate minimum ROAS optimization guarantees, though this is still tied to target performance rather than a strict take-rate cap.
Most importantly, AppLovin’s platform is extremely scalable, enabling advertisers to access over 1.6B daily active users who are connected to the MAX supply-side platform.
This allows the company to serve advertisers of all sizes, helping them rapidly scale their business globally.
How effective are their services?
For example, following Apple’s infamous 2022 privacy rule changes, many apps saw significant revenue declines. One of those apps, Daily Yoga, sought AppLovin’s help to reignite growth, and the results were incredible and instantaneous.
100% month-over-month growth in US app installs
62% growth in day zero ROAS
24% growth in overall ROAS
Reached 16th place in the US Apple App Store health and fitness rankings
1.2. MAX
Similarly, as with businesses looking to increase sales by paying for attention, there are those who capture a lot of attention and are looking to earn income by selling access to that attention.
Connecting these two parties has always been a challenge!
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