APP: The One That Got Away – Lessons from a Missed 10x Opportunity

APP 0.00%↑ has been on an epic tear over the last few years. After bottoming in Dec ‘22 at just over $9 share it has has since appreciated over 30x, finishing the week at a mind blowing $290/share. I initially got involved with APP in July’23 at just under $30 per share and detailed my initial thoughts here. At the time APP was already up 300% from the bottom but was sill trading a very reasonable valuation and the embedded growth/margin assumptions in a reverse DCF were not heroic in orde to generate double digit returns over the next few years. I bought the name because I thought downside was limited, creating a favorable r/r. The major theme was APPs strategic pivot toward a high-margin software business. Early in 2023, the company introduced its AXON 2 advertising technology, quickly leading to substantial revenue growth in its Software Platform segment. More importantly than the revenue growth, the platform has consistently shown high flow-through to adjusted EBITDA due to its low incremental cost structure. Initially, the Software Platform was predominantly utilized by mobile gaming advertisers. By mid-2024, they began pilot programs in e-commerce and web-based advertising, providing a diversified revenue base and opening potential in new advertising verticals. The e-commerce pilot exceeded initial expectations, with plans to scale further in 2025.

EBITDA margin expansion is the real story here and the area where most investors, including myself, have mis-modeled. AXON technology is highly efficient and performance-driven, with self-learning capabilities that improve ad efficiency. Since most operational costs (cloud infrastructure, R&D) are fixed, incremental revenue flows through to adjusted EBITDA at incredibly high rates — often upwards of 80% in recent quarters. The platform’s fixed costs don't scale linearly with revenue, allowing AXON to serve more impressions and drive higher ad spend without proportional cost increases, resulting in impressive margins. AXON attracts advertisers looking for measurable returns on ad spend, especially in mobile gaming, allowing the platform to capture a larger share of advertiser budgets. Advertisers increase spend in line with AXON's ability to optimize ad placements and user acquisition, meaning the platform’s improved ad performance drives more revenue without significant cost upticks.

From 3Q23, APP's Apps segment revenue has been flat, while Software Platform revenue grew 66% year-over-year (from $504M in 3Q23 to $835M in 3Q24), now making up 70% of total revenue. Software Platform adjusted EBITDA margins hit 78% as of 3Q24, with incremental adjusted EBITDA margins over the last year at 85%. These margins are unheard of at this level of revenue growth. Only a handful of companies can achieve such growth without incremental investments, leading to remarkable margins. This suggests that APP has built a significant moat with AXON, its AI-driven platform, allowing it to capture massive market share in mobile advertising. The mobile ad market itself has continued to grow around 12% annually, driven by the expansion of mobile users and ad spend, yet AXON is now involved in a much larger share of these transactions. This relative revenue growth trajectory signals that App’s platform is leading in a growing market, reinforcing its position as THE player in mobile ads.

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This is a postmortem on my position in APP. While I made a solid return of ~340%, I left a lot on the table. If I’d held shares to today, I’d be looking at almost a 10x return. APP serves as a prime example of how stocks become 10 and 100 baggers. It combines revenue growth and/or margin expansion that investors completely mis-modeled with a massive sentiment shift from a depressed outlook to euphoric highs. This combination fuels explosive returns, and APP had both working in its favor in 2022/2023. Looking back at estimates from 18 months ago, sell-side consensus pegged APP at $3.1B in revenue for 2024, with growth rates of 6% and 12% expected over the next two years, bringing it to $3.7B by 2026. Adjusted EBITDA was projected at $1.3B for 2024, implying a 41% adjusted operating margin, expanding to 44% by 2026.

Fast forward to today, and those estimates seem like relics. Revenue for 2024 is now projected to be 50% higher, at $4.6B, with adjusted EBITDA up 108% to $2.6B, reflecting a 57% margin thanks to Software Platform growth. Revenue growth for 2025 and 2026 is now expected at 18% and 17%, while adjusted EBITDA is projected to grow 24% and 22%, reaching $4B in 2026 at a 62% margin. These rare, dramatic upward revisions indicate that analysts didn’t fully grasp the strength of APP’s execution or the sustainability of its revenue growth and margin expansion within the platform segment. Diverging from consensus on margin trajectory and being right about it was a key factor in APP’s massive returns.

Drastic changes in consensus estimates typically drive shifts in sentiment and valuation multiples. At the end of '22, APP was trading at 5-6x consensus adjusted EBITDA, and by the time I got involved, multiples had climbed to just under 10x. Fast forward to today, and APP trades at 39x and 31x adjusted EBITDA for '24 and '25, respectively — far from the bargain it once was. This combination — with consensus adjusted EBITDA more than doubling over the past 18 months and the multiple expanding over 3x, from under 10x to nearly 40x — is extremely rare. Outside of cases like NVDA, such outcomes are almost unheard of. This mix of massive upward revisions in earnings and significant multiple expansion is what powered APP’s exceptional stock returns.

I started scaling out of my position just under $120/share and fully exited when shares surpassed $130, around a $45B EV. In hindsight, I left a substantial amount on the table, as the stock is now at $290, with EV exceeding $100B. So, where did I go wrong? My first mistake was being too skeptical about the sustainability of ongoing margin expansion and positive EBITDA revisions. While my estimates were higher than the street’s at the time, they weren’t bullish enough. I heard plenty of anecdotal evidence from friends in ad tech and expert calls about AXON's dominance, but I assumed this information was already factored into the sell side’s assumptions. I anchored to consensus estimates, finding it hard to deviate materially, and underestimated the incremental margins for the software platform. 80%+ incremental margins are rare and tend to draw competition, so I was conservative in projecting their durability. My revenue estimates were close to current levels, but my margin estimates were off — and ultimately, margins, not revenue, drove the returns.

On the multiple side, I was too conservative. I struggled to justify a free cash flow multiple above 30x, assuming a ~50% adjusted EBITDA-to-FCF conversion rate that turned out to be too low. Using this, I applied a 15x 2026 adjusted EBITDA multiple to arrive at an EV of ~$50B, close to where the stock was trading at the time, making the risk/reward look unattractive and leading me to exit. Adding to the error, this was a large position that had tripled in about a year, so the psychological pressure to lock in gains and avoid potential losses was strong. Ultimately, a combination of underestimating the margin potential, using conservative multiples, and the fear of losing gains led to an early exit, costing me substantial upside. Going forward, I’ll strive to be more patient with companies undergoing transformational shifts, and if a position becomes too large to sleep soundly, consider hedging instead of exiting entirely. This was a painful lesson, not the first and surely not the last, but one I’ll use to keep improving as an investor.

Despite the massive run-up in the stock, APP still isn’t trading at an unreasonable multiple, especially relative to peers like TTD, given its stronger growth and margin profile. Current consensus estimates project adjusted EBITDA of $4B in 2026, which, at the current $100B EV, puts the multiple at around 25x adjusted EBITDA, or 42x FCF assuming a 60% EBITDA-to-FCF conversion. Considering that the Software Platform segment operates with EBITDA margins over 70% (translating to a 40%+ FCF margin) and has double-digit top-line growth, this multiple isn’t extreme. In fact, it could expand further as investors gain confidence in the durability of APP’s margin profile and the sustainability of its revenue growth. Unfortunately, I don’t have strong conviction on whether APP has built an impenetrable moat or if it will face stiffer competition over the next few years, given the attractive profile of its software business. So, for now, I’ll be watching from the sidelines, wiping away my tears as I think about what this could have been.