Core Viewpoint - Citi maintains a "Buy" rating for Applovin, focusing on its leadership in the "AI + Digital Advertising" sector, with a 12-month target price of $820, indicating strong growth potential in non-mobile gaming areas like e-commerce and fintech [1][2]. Company Overview - Applovin is recognized as a leader in AI-driven advertising solutions, with its core product, the Axon platform, showing robust growth. As of December 5, the number of e-commerce clients reached 3,545, a 17% increase from November 7, with a stable market share of 68.2% in the U.S. [1][2]. Financial Performance - Expected revenue for Applovin in 2025 is $5.74 billion, with an EBITDA margin of 78.3%. The forecasted free cash flow (FCF) for 2026 is $4.85 billion, supporting its long-term value as a core player in the AI advertising ecosystem [2]. Market Positioning - The target price of $820 corresponds to a 40x multiple of the expected FCF for 2027, significantly higher than the average 25-30x for peers. This premium is justified by Applovin's expected revenue CAGR of 33% from 2023 to 2026, compared to the industry average of 15-20% [2]. Macro Environment - The global digital advertising budget is projected to grow at a CAGR of 8-10% from 2025 to 2027, with AI-driven digital advertising expected to increase its share to 30%. The U.S. revenue share of 68% reduces international regulatory risk exposure [3]. Industry Trends - The integration of AI in digital advertising is becoming a significant trend, with major players like Google and Meta rapidly adopting generative AI technologies to enhance ad performance and user engagement [3][4]. Structural Impact of AI - AI enhances the precision and conversion rates of digital advertising, leading to higher ROI for advertisers. However, AI-generated content may also divert traffic, necessitating a reevaluation of traditional ad inventory value [4]. Company Operations - Applovin, headquartered in Palo Alto, California, specializes in AI-driven advertising solutions for e-commerce and gaming companies, optimizing ad placements through its Axon platform to significantly boost sales and profits for advertisers [4].

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - The report focuses on the commercialization progress of AI applications, highlighting significant advancements in various sectors, including large models, AI video, AI programming, and enterprise-level AI software [4][28] - The report emphasizes the rapid growth in token consumption for AI applications, indicating accelerated commercialization and the emergence of new revenue streams [4][15] - Key companies in the AI space are experiencing substantial valuation increases, with several achieving over $1 billion in annual recurring revenue (ARR) [16][21] Summary by Sections 1. AI Application Overview: Acceleration of Commercialization - AI applications are witnessing a significant increase in token consumption, reflecting faster commercialization progress [4] - Major models like OpenAI have achieved an ARR of $12 billion, while AI video tools are approaching the $100 million ARR milestone [4][15] 2. Internet Giants: Recommendation System Upgrades + Chatbot - Companies like Google, OpenAI, and Meta are enhancing their recommendation systems and developing independent AI applications [4][26] - The integration of AI chatbots into traditional applications is becoming a core area for computational consumption [14] 3. AI Programming: One of the Hottest Application Directions - AI programming tools are gaining traction, with companies like Anysphere achieving an ARR of $500 million [17] - The commercialization of AI programming is accelerating, with several startups reaching significant revenue milestones [17][18] 4. Enterprise-Level AI: Still Awaiting Large-Scale Implementation - The report notes that while enterprise AI has a large potential market, its commercialization has been slower compared to other sectors [4][25] - Companies are expected to see significant acceleration in AI implementation by 2026 [17] 5. AI Creative Tools: Initial Commercialization of AI Video - AI video tools are beginning to show revenue potential, with companies like Synthesia reaching an ARR of $100 million [15][21] - The report highlights the impact of AI on content creation in education and gaming [4][28] 6. Domestic AI Application Progress - By mid-2025, China's public cloud service market for large models is projected to reach 537 trillion tokens, indicating robust growth in AI applications domestically [4] 7. Key Company Valuation Table - The report provides a detailed valuation table for key companies in the AI sector, showcasing significant increases in their market valuations and ARR figures [16][22]

Financial Data and Key Metrics Changes - Total revenue increased by 40% year-over-year to $1,500,000,000, while adjusted EBITDA rose by 83% to $1,000,000,000, achieving a 68% adjusted EBITDA margin [18] - Free cash flow reached $826,000,000, up 113% year-over-year, with a quarter-over-quarter growth of 19% [18][19] - The company repurchased 3,400,000 shares for a total cost of $1,200,000,000, reducing total outstanding shares to 338,000,000 [19] Business Line Data and Key Metrics Changes - The advertising business generated $1,160,000,000 in revenue and $943,000,000 in adjusted EBITDA, achieving an 81% margin [19] - Revenue growth was driven by enhancements in AI-driven technology and the full quarter impact of web-based advertising solutions [20] Market Data and Key Metrics Changes - The company reported that over 90% of its advertising revenue comes from mobile games, which are not directly impacted by tariffs [13] - The web advertising segment is still in its early stages, with less than 0.1% market penetration, indicating significant growth potential [12][14] Company Strategy and Development Direction - The company is focusing on three key priorities for 2025: improving machine learning models, advancing e-commerce and web advertising solutions, and enhancing ad testing and automated ad creation [10] - A definitive agreement has been signed to sell the games business, allowing the company to sharpen its focus on advertising [20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to grow despite macroeconomic changes, citing low market penetration and a strong demand for advertising services [14][16] - The management team emphasized the importance of continuous improvement in technology and the potential for significant growth in the web advertising space [39][40] Other Important Information - The company is set to launch a self-service dashboard for select customers, which is expected to unlock a massive opportunity for growth [12] - The adjusted EBITDA per employee in the advertising business has risen to approximately $4,000,000 annually, reflecting operational excellence [16] Q&A Session Summary Question: Guidance for next quarter and potential sequential decline in ads revenue - Management clarified that the current guidance reflects typical seasonality and that past performance is not indicative of future growth trends [29][30] Question: Category exposure and onboarding new advertisers - Management indicated that they are not actively pushing into new categories but are focused on improving self-service tools to onboard existing demand [37][39] Question: Churn among advertisers and spend per advertiser - Management reported a sub 3% churn rate for advertisers spending $250,000 annually, indicating strong retention [50][51] Question: Velocity of new web advertiser additions - Management noted that the pace of new advertiser additions has slowed due to resource constraints but expects to ramp up onboarding with the new self-service dashboard [70] Question: Self-service model expectations - Management anticipates that advertisers will gradually build budgets as they prove the effectiveness of campaigns on the new platform [83][84] Question: Contribution of non-gaming audience to total advertising revenue - Management remains optimistic about the e-commerce business potentially exceeding the previously estimated 10% contribution to total revenue [100]

Financial Data and Key Metrics Changes - Total revenue increased by 40% year-over-year to $1,500,000,000, while adjusted EBITDA rose by 83% to $1,000,000,000, achieving a 68% adjusted EBITDA margin [16] - Free cash flow reached $826,000,000, up 113% year-over-year, with a quarter-over-quarter growth of 19% [16] - The company repurchased 3,400,000 shares for a total cost of $1,200,000,000, reducing total outstanding shares to 338,000,000 [17] Business Line Data and Key Metrics Changes - The advertising business generated $1,160,000,000 in revenue and $943,000,000 in adjusted EBITDA, achieving an 81% margin [17] - Revenue growth was driven by enhancements in AI-driven technology and the full quarter impact of web-based advertising solutions [18] Market Data and Key Metrics Changes - The company is focusing on expanding into broader categories beyond gaming, with significant investments in e-commerce and web advertising solutions [5][8] - The web advertising space is still in its early stages, with less than 0.1% market penetration, indicating substantial growth potential [10] Company Strategy and Development Direction - The company is divesting its games business to sharpen its focus on advertising, with a definitive agreement signed for the sale [7][18] - Key priorities for 2025 include improving machine learning models, advancing e-commerce and web advertising solutions, and enhancing ad testing and automated ad creation [8][9] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to grow through macroeconomic changes, such as tariffs, due to low market penetration [11] - The competitive landscape is viewed positively, as it drives innovation and improvement within the company [13] - The company anticipates continued strong growth, with guidance for the advertising segment projecting revenue between $1,000,000,000 and $1,215,000,000 for Q2 2025 [19] Other Important Information - The company is developing a self-service dashboard for advertisers, expected to unlock significant growth opportunities once fully rolled out [10] - The adjusted EBITDA per employee in the advertising business has risen to approximately $4,000,000 annually, reflecting operational excellence [14] Q&A Session Summary Question: Guidance for next quarter and potential sequential decline in ads revenue - Management clarified that the guidance reflects typical seasonality and emphasized that past performance is not indicative of future growth trends [22][25] Question: Category exposure and onboarding new advertisers - Management indicated that they are not actively pushing into new categories but are focused on improving self-service tools to onboard existing demand [32][34] Question: Churn among advertisers and spend per advertiser - Churn for advertisers spending $250,000 annually is under 3%, with expectations of becoming a required marketing destination for web advertisers as the product matures [44][48] Question: Velocity of new web advertiser additions - The pace of new advertiser additions has slowed due to resource constraints, but the launch of the self-service dashboard is expected to accelerate onboarding [67][70] Question: Impact of App Store regulatory news on ad spend - Management views potential fee relief for mobile games positively, as it could lead to increased ad spend from developers [126]