With the recent upsurge of speculation on "AI applications" in the A-share and US stock markets in the past few days, a well-known AI advertising marketing concept stock in the gaming industry $Applovin (APP.US)$ , with astonishing gains, has broken into the minds of millions of investors as the new "AI myth."

Considering the 7% surge on Tuesday, AppLovin's stock in the U.S. has achieved an increase of 706% this year, rising from 39 dollars at the beginning of the year to 321 dollars, with a market cap of 107.7 billion dollars.

(AppLovin daily chart, source: TradingView)

As a result, in the Hong Kong stock market $MOBVISTA (01860.HK)$The increase this month has already exceeded 300%, in the A-share market.$BlueFocus Intelligent Communications Group (300058.SZ)$A 16% large bullish candlestick was formed on Wednesday. However, it needs to be emphasized here that even for companies specializing in digital marketing, AppLovin's presence in the US stock market definitely has some unique aspects.

Trump's interference almost made it a Chinese concept stock.

In fact, in the capital circle of china, which has made significant achievements in the gaming and penghua csi mobile internet index fund(lof)-a industries, the value of AppLovin's mobile marketing business was already noted a decade ago.

Although Google and Meta (Facebook) dominate in the fields of search engine and social media advertising, a considerable amount of time spent by users on mobile phones is within a single app, therefore, the explosion of mobile marketing is just a matter of time.

AppLovin was founded in 2012 and only began public fundraising in 2014. In September 2016, the company announced an agreement to sell to the Chinese private equity firm Orient Hongtai Capital for 1.4 billion USD.

(Source: businesswire)

Historical data shows that the trading partner Orient Hongtai was a subsidiary of Orient's capital, which is a wholly-owned subsidiary of the A+H listed company Orient Securities.

Unfortunately, that time point already entered the 'Trump 1.0 era.'

Under the obstruction of the Committee on Foreign Investment in the usa (CFIUS), the acquisition deal ultimately turned into a purchase of a minority stake + debt financing. Subsequently, AppLovin was forced to turn to local investors in the usa for financing and introduced KKR as a strategic investor in 2018, at which time the company's valuation was only 2 billion USD.

Since then, AppLovin entered the fast lane of crazy acquisition and expansion. In April 2021, AppLovin went public on the nasdaq with an IPO valuation of 25 billion USD. KKR's investment of 0.4 billion USD subsequently turned into stocks worth nearly 8 billion USD. Of course, Orient Hongtai also made a significant profit due to its foresight.

(Source: AppLovin prospectus)

After enjoying rapid growth brought by financial leverage, AppLovin also attempted to acquire another 'AI + game' concept stock Unity, which had attracted the attention of chinese shareholders, but that deal ultimately did not succeed.

What investors are speculating: AI is a black box, as long as it works well.

As an emerging programmatic mobile marketing platform, AppLovin serves both advertisers and application developers (ad publishers). In short, it helps advertisers sell advertising space at higher prices (and shares the revenue) while allowing advertisers to achieve better marketing results.

The better the advertising results, the more developers are willing to invest on the platform, leading to better company performance. In the third-quarter report released earlier this month, software service platform revenue rose from $0.5 billion in the same period last year to $0.835 billion.

(Source: AppLovin's third-quarter shareholder letter)

AppLovin also owns the Connected TV platform (CTV) Wurl and provides advertising measurement and optimization analysis through its saas business. Having originated from the gaming industry, the company also has its mobile game development and publishing business, but advertising marketing remains the major source of revenue.

Strictly speaking, this business of matching advertisers, deployment platforms, and potential targets has always belonged to the so-called ai concept stocks. The root cause of this wave of stock price fluctuations is the company's launch of the 2.0 version of the artificial intelligence advertising technology software Axon in 2023.

The company once provided a very insightful interpretation of the role of ai on the application side.

During the earnings call in February this year, an investor asked company founder and CEO Adam Foroughi what the differences were between Axon 2.0 and the original version.

Foroughi responded, "It's just better."

Foroughi also compared Axon 2.0 to ChatGPT, which uses a "black box algorithm." He stated that while most people do not understand how this technology works, they know that GPT-4 is better than GPT-3.5 because they get better results when they enter prompts in the chat box. Axon 2.0 is similar, as a lot of data indicates it is more efficient and has a stronger revenue conversion capability.

During the earnings conference in early November, the company's founder and CEO Adam Foroughi introduced that consumers now use mobile devices for 4-5 hours daily, with about 45 minutes of that time being untapped for most advertisers, and the company's platform can unlock this area. The company is also developing in vertical industries outside of the gaming sector to increase more potential growth space.

Beware of valuation bubbles.

Obviously, the story of AppLovin had previously been shown in other related individual stocks.$Palantir (PLTR.US)$、$Duolingo (DUOL.US)$With the significant expansion of performance driven by AI applications, the capital markets have started to speculate like crazy.

The core issue is whether the revenue expectations for these software concept stocks can keep up with the momentum of "stock prices doubling and doubling again," which still carries a lot of uncertainty. This also means that once market sentiment changes, investors who get the last piece of the "pass-the-parcel" game may face rapid and painful losses.

According to the latest data, AppLovin's trailing PE ratio has reached 97 times, Duolingo is 175 times, and Palantir has reached 314 times, far surpassing yesterday's$Microsoft (MSFT.US)$partnering to enter the enterprise market$C3.ai (AI.US)$has not yet become profitable.

In the third-quarter conference call, AppLovin's CEO and founder Foroughi maintained an expectation of a 20%-30% annual growth rate for the company's advertising business (4%-5% quarterly), only stating that the company's business might see some "sudden" growth with the upgrade of the Axon algorithm.

Editor/rice