AppLovin Posts $2.2 Billion Quarter, Yet Investors Stay Wary

AppLovin earned just under $2.2 billion in the third quarter, with $1.44 billion of that falling straight to net income, according to its earnings report released after hours on Wednesday. CFO Matthew Stumpf called the result an "industry-leading" profit margin of roughly 66%.

That margin has no recent peer in ad tech. The last comparable figure came from Rocket Fuel, whose take rate above 60% preceded a disastrous collapse. The association with third-party ad tech is part of AppLovin's challenge with investors, who remain cautious despite the numbers.

Co-founder and CEO Adam Foroughi acknowledged the education required among media buyers and shareholders before the consumer ad business can accelerate. "People have to go, 'this is a bigger ad tech company, that's sort-of-independent ad tech without a first-party site, [and] bigger than anything we've ever seen before,'" Foroughi told investors.

How fast is the consumer ad business growing?

The Consumer ads segment is growing more than 100% year over year, Foroughi said, though AppLovin does not disclose the segment's revenue. The business only formally launched out of beta last year, so revenue remains low. Foroughi repeatedly described "headroom for growth" and said revenue will compound as advertisers run incrementality attribution studies (tests that isolate ad-driven sales from sales that would happen anyway) and gain confidence in their ROAS (return on ad spend).

Apple's changes to iOS and mobile web inventory also work in AppLovin's favor, he argued. Traditional "open web" buying is largely a cheap reach play, whereas AppLovin tracks impressions through to conversion. A platform with strong ROAS may see CPM (cost per thousand impressions) increases without losing advertisers. The mobile gaming space is "much, much bigger" now, and the web is becoming less trackable. "We think a lot of those dollars will shift into the app space," Foroughi said.

What stands between advertisers and AppLovin?

Consumer advertisers face a creative knowledge gap. Most have never bought ads in mobile games. Social advertisers rely on short videos with a hook in a second or two, while AppLovin's gaming audience watches full-screen ads for 30 to 60 seconds. "There's a learning process here that has to happen so that the media buyers really understand the framework," Foroughi said. He predicted standardized creative approaches will emerge: "There will be playbooks for our platform."

Can the growth rate hold?

Foroughi set an ambitious marker: "We believe this business can compound at roughly 30% annually over the long term." Ad revenue grew 55% in the quarter, with a margin that is "probably second to none," he said.

Analysts pressed on durability. Stephen Ju of UBS Investment Bank noted advertisers reportedly anticipate price hikes as gaming and consumer advertisers now bid for the same impressions. Matthew Cost of Morgan Stanley asked when the "law of large numbers" would end 20%-30% growth projections and whether the promised headroom would come from CTV (connected TV). Foroughi said CTV will not produce "accretive" numbers soon, though a pilot program for AppLovin CTV ads is running now.

Shweta Khajuria of Wolfe Research asked directly what AppLovin could share to give investors more confidence in its business model. Foroughi pointed to a record of 15 earnings beats in the past 16 quarterly reports, and argued no other large public tech company matches its combination of scale, growth and margin. The consumer business remains too young for predictive benchmarks: "You sort of have to make your own guesses."

Unlike Rocket Fuel, AppLovin's margin carries no sign of sudden collapse, and its spending drives real economic activity. "That ad spend is creating GDP," Foroughi said. "It's creating new transactions that otherwise wouldn't have been there." Whether Wall Street buys that argument may depend on the consumer segment turning headroom into disclosed revenue.