What is the truth behind this US stock AI bull company being shorted?

In 2024, mobile advertising technology company AppLovin (APP) is undoubtedly one of the shining star stocks in the U.S. stock market. With the integration of AI technology, its stock price skyrocketed sevenfold within a year, quickly becoming the focus of the investment community, surpassing Nvidia, and becoming one of the representatives of the "new favorites" in AI.

However, on January 8, 2025, renowned analyst Lauren Balik issued a bearish statement on AppLovin. Balik has significant influence in the short-selling investment circle, having successfully bet on the decline of tech stocks multiple times, including Snowflake (SNOW), Datadog (DBT), and Zeta Global (ZETA), earning her the title of short-selling expert in tech stocks.

So, why did Lauren Balik choose to short APP at its peak moment? What deep analysis and thoughts lie behind her decision? According to an in-depth analysis by U.S. stock investment website, Lauren Balik's bearish stance on APP primarily stems from three key factors.

Fake Clicks and Advertising Cross-Promotion

According to Lauren Balik's in-depth analysis, multiple games under APP commonly engage in cheating through Click Farm technology, which severely affects the authenticity and effectiveness of advertisements. Click Farm technology essentially relies on automated scripts to generate fake click traffic, thereby providing unjust profits to advertisers. Through this method, APP not only misleads advertisers' return on investment but also alters the logic of ad distribution and display to some extent.

Specifically, APP achieves this cheating behavior by inducing players to click on ads, and the game design itself often has issues. Many of APP's games cleverly design ad pop-ups and in-game operation paths, making it difficult for players to avoid clicking on ads. This click path highly overlaps with the display time of ad pop-ups, forming a "click-ad" chain that causes a surge in fake click volume. Worst of all, this behavior affects the player experience, constantly interrupting them with ads during gameplay, and this impact is not limited to individual games but is prevalent in most games under APP.

In terms of advertising placement, APP promotes ads to other game companies through its advertising platform MAX, particularly through collaborations with companies like KAYAC and Playgendary. MAX not only showcases the results of collaborations with these companies but even highlights their advertising placement cases as selling points. However, as Lauren Balik pointed out, the ads pushed by APP are not always diverse.

For example, when APP recommended Playgendary's "Masked Tomb," this game ranked high on the free action game list in the U.S., but when Lauren personally experienced it, she found that the game was filled with fullscreen ads lasting up to 12 minutes, with the ad duration even exceeding the length of the game itselfThis situation is not an isolated phenomenon; other games promoted by the APP also face similar issues.

Moreover, in some games, the advertisements are not aimed at promoting external products but rather at cross-promotion of other games under the same company.

For example, in the game "Collision Head," players encounter a 30-second advertisement after completing a level. When players click the "skip" button, the advertisement page still directly redirects to the product purchase page promoted by the APP, and the advertisement banners continue to push notifications. Although this practice temporarily increases the advertisement click-through rate, it greatly affects the players' gaming experience in the long run. Games should be a form of relaxation and entertainment, but now they have turned into an ocean of advertisements, with every click by players almost accompanied by advertisement interruptions, which undoubtedly accelerates player attrition.

Decline of Advertising Casual Games, Unsustainable Growth

The advertising revenue of the APP is mainly concentrated in hyper-casual games, which share some common characteristics: easy to pick up, few levels, and simple gameplay. These games typically rely on quick onboarding and highly repetitive gameplay to attract players, allowing them to quickly draw in large numbers of users and profit through advertisements. However, the hidden danger of this model is that these hyper-casual games often lack depth and long-term appeal, making it difficult to maintain long-term player engagement.

Lauren Balik also mentioned in her analysis that although the APP has driven in-app purchase revenue for these games in the short term through advertising, this growth model has sustainability issues. Especially as the global market for hyper-casual games gradually approaches saturation, player interest has significantly begun to decline.

According to data from the first half of 2024, global downloads of hyper-casual games decreased by 10%, while in the fourth quarter of 2023, revenue from global mid-to-heavy games also saw a 9% decline. This trend reflects that although the APP is still driving revenue through advertisements and short-term purchases, this model is gradually losing market support.

Specifically, the core issue with hyper-casual games lies in their simplistic gameplay and lack of innovation, which weakens their ability to continuously attract players.

For example, the game "Ragdoll: Let's Destroy!" developed in collaboration with KAYAC, although once ranked high on the global free action game charts, ultimately led to a decline in player interest due to its repetitiveness and lack of depth in gameplay. Once such games lose long-term player engagement, advertising revenue will naturally be affected.

What is even more concerning is that although the overall revenue of the APP has seen growth in certain quarters, this growth does not stem from genuine market demand or product innovation, but rather from advertising traffic. Data shows that the APP's total revenue increased by less than 50% from the third quarter of 2023 to the third quarter of 2024, while net profit surged by 291% during the same period. On the surface, such data appears very strong, but in reality, this profit growth relies more on false click traffic and short-term advertising revenue rather than on healthy user engagement and innovative game contentComplex Equity Structure and Money Laundering Suspicions

In addition to advertising issues and the sustainability of the gaming model, the company structure of the APP has also attracted considerable attention.

The equity structure of the APP is exceptionally complex, involving multiple levels of equity transactions and cross-border capital flows, making its internal trading network appear intricate. For example, the APP issued convertible notes for Class A common stock to its subsidiary Solkrist, which were later transferred to Athena Studio located in Cyprus. Although the developers at Athena Studio are from Vietnam, the studio remains a subsidiary of the APP in Cyprus, specifically engaged in advertising for the APP's advertising platform.

More seriously, the APP collaborates with certain companies suspected of involvement in money laundering. For instance, Playgendary is a significant advertiser for the APP, and some members of that company previously worked at Wargaming, which has long been accused of being linked to money laundering activities associated with Russian organized crime. Even more concerning is that Wargaming's developers obtained Cypriot golden passports through investment, and Cyprus has become a hotspot for global money laundering activities due to its lax regulatory policies.

These complex equity structures and cross-border capital flows, along with the APP's collaboration with some companies suspected of money laundering, create significant uncertainty for the APP's advertising platform. This intricate structure raises suspicions about whether the APP is using this network to conceal some undisclosed financial activities. Moreover, despite these gaming companies primarily advertising through the APP, they lack other more reliable advertising channels, which poses risks to the legitimacy and compliance of the APP's advertising platform.

In summary, the APP's business model is facing increasing challenges. Its practices of manipulating advertising traffic through fake clicks and mutual advertising severely impact the health of the advertising ecosystem and negatively affect players' gaming experiences. While the profit model of hyper-casual games relying on advertising has seen short-term success, the lack of innovation and depth, coupled with soft market demand, makes this growth model difficult to sustain. Additionally, the complex equity structure and collaboration with companies suspected of money laundering expose the APP's business operations to significant legal and compliance risks.

If the APP continues to maintain its current growth model without adjusting its advertising strategies and company structure, it will face even more severe challenges, especially as the global advertising and gaming markets become saturated, leaving its future development fraught with uncertainty. For investors, whether the APP's business model can sustain long-term viability remains a thought-provoking question.

Source: US Stock Investment Network