Razor's Edge: Market Commentary TTD/APP/CHIIIINA/SOUN

Well last week was pretty pretty good. So, time for the recap...

TTD

Not much to say at this point other than this couldn't have gone any better. A proper banger of a structural thesis playing out instantly. I figured this would be good for 40% during the year so getting 33% immediately with serious short-term option exposure is enough for me. I do think considerable downside remains, but with the Google adtech case looming and a proper deck reshuffle going on in this ecosystem I'm content to be a spectator for now. But for those focusing on the numbers TTD going to going to grow sub 15% this year with flatish EBITDA growth. So, another 30% down is kind of a given on fundamentals if you really have a crystal ball on how things play out with google post the obvious trial loss and don't think walmart or someone else gets interested in this biz till its in the $25bl range.

Mclovin

If we talking granular business analysis this was more spot on then TTD, with them announcing the sale of the games studio and reporting an ads biz topline q almost exactly where I had it modeled based on my work. This company continues to drive people nuts. Here is the thing about App. Despite owning it with some good exposure at less then 10% of current price, I didn't truly understand this business till late last year. At this point the term "black box" is just short for lazy in my book. Yes, it takes some work, but you can get a very firm grasp of how the biz works and how they got here if you put in the time.

I got an email post print from a bear basically arguing that its absurd that Applovin is worth more than all mobile casual gaming studio combined, and that its the definition of a bubble. My response was...

"Is there such a thing as sticky casual mobile gaming user?"

It's surprising that people don't think about the fact that these mobile game companies have to perpetually reacquire users and that an entire ecosystem built around this behavior essentially is structured to make the UA engine the most valuable biz by far in the space. Not only should it be worth more then all of them combined, it should be worth many multiples of them combined.

People should really think long hard about this.

As I stated before, there is no loyalty in casual gaming UA, you simply go where the ROI is.

So, there is this assumption that App is so profitable that it's unsustainable because a more competitive UA market would deliver higher ROI to publishers. I personally don't believe that would be the case. Let's say that somehow tmrw this market share that App has was split with Unity, would uac come down? I don't think so. I'm more inclined to believe this would look like a duopolistic market with lower ROI's to publishers. Really what would need to change to impact Applovin would be casual mobile games with more sticky long-term users or and thus less aggregate need for UA. It's that or effectively a shrinkage of the broader casual gaming ecosystem as Ai friends (acquiring these users cud be an interesting biz for the casual gaming ua leader though when that time comes) or what not take away the time spent on these games. Or maybe some consolidation and mega publishers emerging who can reduce the arb in a somewhat walled garden fashion.

Anyway, Adam clearly loves FCF per employee, and with the games studio gone this thing is going to look more and more like a quant arb fund. That's great economically but optically you going to have non-stop skeptics on how long it can last and what multiple that deserves. With that in mind I'm out of this as well for now. This was the reset ahead of potential immediate growth in a massive ecom tam and maybe perf impaired CTV eventually (which if u think about the long tail kind of content reminds me of casual mobile gaming users). I think App is going to deliver on top and bottom line no problem this year, but my sense is you eventually get to a point where the expectation at scale is not paying more than 25x 1yr fwd EBITDA. And selling the game studio here does now put a spotlight on what that EBITDA is worth in the industry vs the UA engine. I had said the game studio alone probably wouldn't garner more than a $1bl valuation if it was trading as a separate biz. Turns out that was spot on.

The problem with that now is I don't think anyone doing topdown math on this was backing out the zero growth games biz at 3x EBITDA. At my entry point in size on App this past few months, I had my cost at 18.5x 2025 EBITDA for essentially what I felt the next 12 months would look like with a empirically sensible forecast. That same forecast now would bump up to 25x then as you strip out the studio. Now add in a 76% move in the stock, and we are talking 43x fwd. And keep in mind there is no FCF/Ebitda multiple expansion story to sell here as its now plain as day for everyone what the bottom line engine looks like. This means the ads biz (which is now the whole biz) needs to be clocking 15% sequential growth q/q cause 10% is now more then baked in. Basically, you priced in double the pre-print consensus topline forecast already if you add back in the games studio. Now that is what I wanted to extract on this trade, because that to me was the base bull case for 2025. However, I knew it would effectively look way more expensive on just that if you backed out games. Not like I was going to trumpet that, but Adam has now forced it for all the metrics focused folks with no understanding of much else. So, yeah fcf per employee looks amazing, but he does lose the benefit of a higher blended ebitda multiple that games was effectively subsidizing.

This means a long here now requires underwriting some serious ecom bull scenario for 2025 share price upside from these levels with bears screaming anything over 30x fwd ebitda for an arb fund is lunacy. So, yea thanks for the lifetime stadium seats and I'll watch this from my skybox for now even with S&P 500 inclusion around the corner.

As to what Adam could do, maybe buy Roku or Pins or even Reddit. Roku is obvioulsy interesting when you consider FAST and CTV long tail has characteristics similar to casual gaming as far as channel/engagement stickyness. And in my opinion the writing is on the wall for this biz long-term so doing something now with their install base is paramount. Pins is kind of image arb/ecom which is also potentially interesting for what these guys specialize in.

China

This is basically my long trading book now. Congrats to those who held the Feb 2025 $90 calls from Nov (i didn't and rolled up just the initial premium to $105 calls when it broke $100). $3 to $41 is a lot more satisfying over 3 months then short-term option 10x+ wins. China really has come through across the board with BYD, XIAOMI, TENCENT etc doing great. Basically, everything but Baidu has faired amazing(told ya!). I have added good amount of PDD along the way and been buying dips here and there trading wise. I am also thinking about adding BYD and then maybe some Zk calls for some spec beta. Core Baba passive which I acquired Aug-Oct 2023 is now up 50%. I still think the stock remains an own, but kind of up to the individual with those long-term gains achieved on what I perceived as the low-hanging fruit part of this. You can also bury the uninvestable take as tech funds have started visiting China again for work/meetings with mgmt.

Soundhound

This was the icing on the cake last week. I was aware Nvda would likely be filing their 13f on Feb 14th, just not sure whether it would be before or after the market. Anyway, despite the very busy week elsewhere I did add some to this thinking there was no way they would have kept this absurd legacy position after the december run. This thing is still totally absurd, so I'm not going to waste any more brain power analysis wise on it and just be thankful I got lucky with my timing on it across the board. But it will fall another 85%...eventually....