AppLovin just dropped a bombshell earnings report, smashing expectations and leaving analysts scrambling for explanations. Revenue soared, profits skyrocketed, and the company painted a picture of unstoppable growth. But buried within the celebratory language lies a subtle shift, a quiet revolution that's powering AppLovin's success and hints at an even more explosive future.

While the obvious star of the show is AXON 2, the company's upgraded AI advertising engine, there's a less-heralded transformation happening beneath the surface: the near-total conversion to real-time bidding (RTB) within their MAX marketplace. This shift, accelerated by Google's recent announcements and completed during Q4 2023, is having profound effects, quietly driving both AppLovin's revenue and the growth of the entire mobile gaming advertising market. AppLovin Investor Relations

The power of RTB lies in its speed and efficiency. Waterfall auctions, the previous industry standard, were clunky and slow. Ad requests would cascade down a pre-set hierarchy of bidders, creating delays and missed opportunities. RTB, however, allows all bidders to compete simultaneously in real time, clearing the auction instantly and delivering ads at lightning speed.

For AppLovin, this translates to a double win. First, their MAX platform, a mediation solution that connects publishers with multiple ad networks, now collects a 5% take rate on the vast majority of transactions. This previously untapped revenue stream is injecting millions directly into AppLovin's software segment, contributing to those eye-popping margins.

Second, and perhaps more importantly, RTB unleashes a chain reaction of growth across the entire ecosystem. Publishers benefit from faster ad delivery, allowing them to show more ads and increase their revenue per user. This, in turn, fuels larger user acquisition budgets, accelerating the growth of games and expanding the overall mobile gaming advertising market.

AppLovin's Software Platform Revenue Growth

The following table showcases AppLovin's Software Platform revenue growth over the past year, fueled by AXON 2 and the shift to RTB.

Reference: AppLovin Investor Relations

Consider this: AppLovin's software platform revenue doubled in the last year, fueled largely by AXON 2 and the surge in advertiser spend. Since the majority of their business is reported on a net revenue basis, this means billions of additional dollars flowed into the mobile gaming advertising market, a space previously measured at around $100 billion. AppLovin's growth isn't simply capturing existing market share; it's actively expanding the pie.

Here's where things get truly fascinating. AppLovin CEO, Adam Foroughi, has repeatedly emphasized that their AI technology has applications far beyond mobile gaming. They're already seeing success in non-gaming apps, and they're actively testing CTV and solutions for carriers and OEMs. What if RTB, with its proven ability to boost efficiency and unlock new budgets, becomes the dominant force in these burgeoning markets as well?

Imagine a world where AppLovin's AI engine, fueled by RTB, optimizes advertising across mobile, CTV, and even carrier-specific app stores. It's a tantalizing vision, one that could transform AppLovin from a mobile gaming powerhouse into a true advertising titan.

The numbers tell a compelling story. AppLovin boasts a 73% EBITDA margin on their software business, a figure virtually unheard of in the software world. This, coupled with their staggering 80% flow-through from incremental revenue to EBITDA, paints a picture of unparalleled profitability and scalability.

The quiet revolution of RTB is already having a seismic impact on AppLovin's business, and its ripple effects are just beginning to be felt. As the company continues to expand its reach and refine its AI technology, the potential for growth is truly staggering. Investors who understand the transformative power of this subtle shift might just be witnessing the birth of a new advertising giant.

"Fun Fact: AppLovin's name comes from the Gaelic word "app" meaning apple and "lovin" meaning love, reflecting the founders' passion for Apple products and the mobile app ecosystem."