AppLovin Corp. (NASDAQ:APP)

The financial performance, as measured by economic profit, demonstrates a consistent pattern of negative value creation over the four-year period. While net operating profit after taxes (NOPAT) exhibits significant volatility, the cost of capital and invested capital remain relatively stable, contributing to the persistent economic loss.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced substantial fluctuations. A significant loss was recorded in 2022, followed by a strong recovery and positive NOPAT in 2023 and 2024. The 2024 NOPAT value represents the highest level observed within the analyzed timeframe.

Cost of Capital

The cost of capital decreased from 24.86% in 2021 to 19.08% in 2022, then increased to 25.55% in 2023 and further to 27.86% in 2024. This upward trend in the cost of capital during the latter two years may exert additional pressure on profitability.

Invested Capital

Invested capital decreased from 2021 to 2023, declining from US$5,576,322 thousand to US$4,514,462 thousand. It experienced a slight increase in 2024, reaching US$4,539,074 thousand, but remained below the 2021 level.

Economic Profit

Economic profit remained negative throughout the period, indicating that the company’s returns did not exceed its cost of capital. The magnitude of the economic loss decreased each year, moving from -US$1,339,900 thousand in 2021 to -US$242,426 thousand in 2024. This suggests an improving, though still negative, trend in value creation. The reduction in economic loss correlates with the increase in NOPAT and the slight stabilization of invested capital in the most recent year.

Despite the improvement in NOPAT and the reduction in economic loss, the company continues to destroy economic value. The increasing cost of capital in the later years warrants continued monitoring, as it could offset the gains from improved operational performance.

Net income (loss) attributable to AppLovin

The net income demonstrates significant volatility over the four-year period. In 2021, the company reported a net income of $35,446 thousand. However, there was a considerable decline in 2022, with a net loss of $192,746 thousand recorded. The financial performance improved markedly in the subsequent years, with net income rebounding to $356,711 thousand in 2023 and substantially increasing to $1,579,776 thousand in 2024. This pattern indicates an initial downturn followed by strong recovery and growth.

Net operating profit after taxes (NOPAT)

The NOPAT values follow a trend similar to net income. Starting at $46,321 thousand in 2021, NOPAT shifted into a negative territory in 2022 with a loss of $171,497 thousand. The metric then showed a sharp improvement in 2023, increasing to $508,977 thousand, and further doubling to $1,022,182 thousand in 2024. This trend suggests an effective turnaround in the company’s operational profitability post-2022.

Overall Analysis

The financial data reveals a period of operational and financial struggle in 2022, characterized by negative net income and NOPAT. The subsequent years reflect a successful recovery, highlighted by substantial positive gains in profitability in 2023 and 2024. The strong upward trajectory in both net income and NOPAT during the latter years underscores significant improvements in both operational efficiency and overall financial health.

The financial data reveals distinct patterns in the company's tax-related figures over the four-year period ending December 31, 2024.

Provision for (benefit from) income taxes

This item fluctuates significantly throughout the period. In 2021, the company recorded a positive provision of approximately $10,973 thousand, indicating an expected tax expense. In 2022, this shifted to a benefit of about $12,230 thousand, suggesting recognition of tax benefits or credits reducing income tax expense. In 2023, the provision reverted to a substantial tax expense of roughly $23,859 thousand. The following year, 2024, again showed a tax benefit of $3,771 thousand. The alternating pattern between tax expenses and benefits over the years may reflect varying profitability levels, tax planning strategies, or one-time adjustments impacting the income tax provision.

Cash operating taxes

This figure shows a consistent upward trend, with a notable acceleration in the final year. Starting at approximately $99,248 thousand in 2021, cash taxes paid increased steadily to $126,764 thousand in 2022 and further to $164,738 thousand in 2023. The year 2024 presents an exceptional rise to $865,828 thousand, which is a significant leap compared to prior years. This sudden increase in cash operating taxes may indicate higher taxable income, changes in tax rates or policy, or settlement of prior tax liabilities, suggesting a considerable impact on the company's cash flows related to tax payments.

Overall, the data demonstrates a pattern of fluctuating tax provisions, alternating between expenses and benefits, alongside a steadily increasing and then sharply rising cash tax outflow. This divergence might hint at timing differences, disparities between accounting tax provision and actual cash taxes paid, or episodic tax events influencing the company’s tax expenses and cash taxes paid differently.

The financial data reveals several notable trends in the company's capital structure and leverage over the four-year period under review.

Total Reported Debt & Leases

The total reported debt and leases remained relatively stable between 2021 and 2023, with slight decreases from approximately 3.35 billion to 3.34 billion US dollars. However, there was a significant increase in 2024, reaching approximately 3.71 billion US dollars. This indicates a shift towards higher leverage or increased borrowing in the most recent year.

Stockholders’ Equity

Stockholders' equity exhibited a consistent declining trend throughout the period. Starting at about 2.14 billion US dollars in 2021, it decreased to roughly 1.90 billion in 2022, followed by a more pronounced decline to about 1.26 billion in 2023, and further reducing to nearly 1.09 billion in 2024. This steady reduction potentially signals increased losses, share repurchases, or distributions exceeding retained earnings, weakening the equity base.

Invested Capital

Invested capital displayed a downward trajectory from 5.58 billion US dollars in 2021 to 4.51 billion in 2023, reflecting a decrease of approximately 19%. In 2024, there was a slight uptick to 4.54 billion US dollars, indicating some stabilization or minor growth after the decline. The overall reduction aligns with the trends observed in equity and debt, suggesting changes in the company's asset base or capital structure.

In summary, the company has experienced a notable increase in debt levels in the most recent year alongside a steady erosion of equity, leading to a reduced invested capital base. These developments point to an increased reliance on debt financing and potential pressures on financial stability, which warrant further analysis of profitability, cash flow, and risk management practices.

The economic spread ratio demonstrates a consistent, though decelerating, improvement over the four-year period. Simultaneously, economic profit exhibits a decreasing negative value, indicating a reduction in the magnitude of losses. Invested capital decreased significantly between 2021 and 2023, then stabilized.

Economic Spread Ratio

The economic spread ratio moved from -24.03% in 2021 to -5.34% in 2024. This represents a substantial, albeit diminishing, improvement each year. The rate of improvement slowed considerably between 2023 and 2024. A less negative ratio suggests the company is becoming more efficient at generating returns above its cost of capital.

Economic Profit

Economic profit, while remaining negative throughout the period, decreased in absolute value from -1,339,900 thousand US dollars in 2021 to -242,426 thousand US dollars in 2024. This indicates that the company’s losses, measured by economic profit, are shrinking year over year. The largest reduction in the magnitude of the loss occurred between 2022 and 2023.

Invested Capital

Invested capital experienced a notable decline from 5,576,322 thousand US dollars in 2021 to 4,514,462 thousand US dollars in 2023. Following this decrease, invested capital remained relatively stable at 4,539,074 thousand US dollars in 2024. This stabilization suggests a potential end to the capital reduction strategy, or a limitation on further reductions.

The combined trends suggest a potential shift towards improved financial performance. The increasing economic spread ratio, coupled with the decreasing magnitude of economic losses, indicates a positive trajectory. However, the slowing rate of improvement in the economic spread ratio and the stabilization of invested capital warrant further investigation to determine the sustainability of these trends.

The economic profit margin demonstrates a consistent, though decelerating, improvement over the four-year period. While negative throughout, the magnitude of the loss has decreased significantly. This suggests an increasing efficiency in generating profit relative to the capital employed, even if absolute economic profit remains negative.

Economic Profit Margin Trend

The economic profit margin began at -48.11% in 2021. It improved to -41.85% in 2022, indicating a lessening of the economic loss. This positive trend continued with a margin of -19.54% in 2023. The most substantial improvement occurred between 2023 and 2024, with the margin reaching -5.16%. This represents a considerable reduction in the percentage of economic loss.

The improvement in the economic profit margin is concurrent with growth in adjusted revenue. While economic profit remains negative, the rate at which revenue is exceeding the cost of capital is increasing. The substantial revenue growth in 2024 appears to be a key driver of the margin improvement.

Relationship to Adjusted Revenue

Adjusted revenue increased from US$2,785,148 thousand in 2021 to US$4,700,528 thousand in 2024. This growth in revenue, coupled with the decreasing negative economic profit margin, suggests that the company is becoming more effective at converting revenue into economic profit, despite still not achieving positive economic profit.

The trend suggests a potential trajectory towards positive economic profit in future periods, assuming continued revenue growth and maintenance of improved capital efficiency. However, continued monitoring is necessary to confirm this trend and assess the sustainability of the improvements.