Bristlemoon Capital: AppLovin ($APP) Investment Case

In their March 2026 quarterly letter, Bristlemoon Capital provides an in-depth update on AppLovin ($APP), the Fund’s largest position, following a brutal quarter in which the stock declined nearly 41%. The firm manages the Bristlemoon Global Fund — a concentrated long/short global equity strategy focused on “mispriced quality” — which itself returned -25.5% for the March quarter, largely weighed down by a broader “AI loser” narrative that indiscriminately punished digital, asset-light businesses. Despite the steep drawdown, Bristlemoon maintains high conviction in AppLovin, arguing the selloff was entirely driven by multiple compression on misplaced AI-disruption fears, with underlying earnings expectations actually continuing to rise throughout the period.

Investment Highlight: AppLovin Corporation ($APP)

Business Overview

• AppLovin enables mobile game publishers to monetise their games through in-app advertising, primarily by serving ads for other mobile games to users
• Bristlemoon notes the company has more recently expanded into e-commerce advertising, which the firm views as a significant and still-early growth opportunity
• The firm describes APP as operating a highly capital-efficient platform, with 84% adjusted EBITDA margins and incremental margins exceeding 95% in Q4 2025
• Bristlemoon characterises AppLovin as generating phenomenal profitability while sustaining rapid growth, with Q4 2025 revenues up 66% year-over-year and adjusted EBITDA up 82%

Why the Stock Sold Off

• Bristlemoon attributes the entire -41% quarterly decline to multiple compression, noting that earnings expectations for APP continued to rise even as the share price fell sharply
• The firm highlights what it describes as irrational market behaviour, including a -17% single-day drop following Google’s announcement of Project Genie — a generative AI game creation tool — which Bristlemoon believes is actually a net positive for AppLovin’s business
• The firm also recounts a short seller attack alleging links between AppLovin’s largest non-insider shareholder and Chinese money laundering schemes; Bristlemoon says it identified the mistaken identity within 30 minutes of research, and notes the short seller subsequently retracted substantially the entire report
• Bristlemoon acknowledges AppLovin is an unusually volatile stock — it fell 57% within a two-month window earlier in 2025 — but views this volatility as separate from the underlying business quality

Core Mobile Ads: Growth Intact

• Bristlemoon believes AppLovin’s core mobile gaming ad business remains robust, with Q4 2025 revenue growth of 66% year-over-year driven by continued algorithm improvements, not the nascent e-commerce segment
• The firm views the core gaming business as providing a high-quality foundation of profitability from which e-commerce growth can be layered on at very high incremental margins

E-Commerce: The Next Growth Leg

• Bristlemoon sees the e-commerce advertising rollout as a major earnings catalyst, with AppLovin having moved from a 600-advertiser pilot to a referral program, and now preparing to launch a self-service platform for advertisers in H1 2026
• The firm highlights a key disclosure from AppLovin CEO Adam Foroughi at the Morgan Stanley TMT Conference: AppLovin currently has a 1.3% conversion rate (CVR) on ads served, meaning 98.7% of purchased ad impressions are effectively wasted on gaming ads
• Bristlemoon argues that serving e-commerce ads against these otherwise-wasted impressions would result in a near-100% effective take rate, since AppLovin has already purchased those impressions
• The firm notes Foroughi has spoken of a potential path to a 5% CVR, which Bristlemoon believes could drive a multiple-times increase in revenue without any increase in total advertiser spend — and at close to 100% incremental margins

AI as a Tailwind, Not a Threat

• Bristlemoon argues AppLovin is an “applied AI winner” rather than a loser, a view it believes the market has badly mispriced
• The firm notes AppLovin’s ad network operates in a full-attention environment with an average unskippable watch time of 30 seconds, well above the sub-5 second norms on Meta or TikTok
• Bristlemoon believes the rollout of automated video ad generation by AppLovin will significantly ease creative barriers for e-commerce brands, noting that 57% of qualified leads currently fail to convert to active campaigns primarily because they lack video ads — a problem AppLovin’s AI tools are designed to solve
• The firm also contends that a world of AI-driven game creation would flood the market with content, commoditising game supply and making AppLovin’s distribution and monetisation platform more valuable, not less

Valuation

• Bristlemoon was able to add to its AppLovin position at below $400 per share, a level the firm views as compelling
• At those prices, the firm notes the business traded at 25x forward GAAP EPS, despite sellside consensus expecting earnings to more than double from 2025 to 2027
• Bristlemoon acknowledges that investor complexity aversion has weighed on the stock, but believes continued robust earnings growth will make APP increasingly difficult for investors to ignore

Bristlemoon Capital views AppLovin as the Fund’s highest-conviction position and sees the recent drawdown as a significant mispricing driven entirely by sentiment rather than fundamentals. The firm believes AppLovin’s combination of a highly profitable core gaming ads business, an e-commerce initiative with extraordinary unit economics, and an AI-enabled competitive position makes it one of the most compelling risk/reward opportunities in the portfolio — and expects the market to reprice this growth potential as earnings continue to compound.

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