Razor's Edge: Mclovin Short Thesis..
I got the sense that I broke a few Mclovin compounder bros hearts by shorting and not really flushing things out for them thesis wise.
This shit isn't complicated. As a bullishly biased investor on the name from $50 to $500, its very easy for me to articulate my views. What made Applovin such an amazeballs compounder on the way up was that it was an adtech stock with a black box dna. Nobody wants to pay up multiple wise for such a biz so you actually got to own it with very good risk reward for most of the journey to market domination. It's always nice to start with a double digit fcf yield for something that could hypergrow.
When I first went long Mclovin it had a 45% ADJ EBITDA MARGIN and 30% FCF MARGIN. Yesterday, they reported a 84% ADJ EBITDA MARGIN and a 79% FCF margin. For me to be a compounder bro in an adtech ua engine with 70%+ mkt share at these prices, I can't pay more then 20x fwd FCF expectations. Mclovin put up $3.9bl in FCF this quarter, at $6bl for next year that gets you to a $120bl mkt cap, but you don't need to arbitrarily come up with numbers now to understand my thought process. It's all very simple. If I'm buying a $150bl-$200bl company at these margins, I am doing so expecting it become a $300-$400bl company in 3-4 years max. And at that point in time I expect the multiple to have compressed to like 15x fwd or less for roughly the same type of biz. That's $20bl-$30bl in FCF from $3.9 in 3-4 years. At Mclovin's current market share you have to imagine you are not getting there with higher margins, and that the real story is going to be much more scale from here. That mean's to 6-7x FCF I need to grow revenue faster than that going forward just to 2x-3x the share price. That's not how compounder bros invest. So, you can love the domination today all you want and Adam's amazing execution and still think this is a very shitty compounder hurdle risk/reward long cause anything goes wrong and you get murdered. Consequently, I want a discount to that 20x 1yrd fwd fcf in perpetuity number which will of course adjust dynamically to the growth rate.
That's the investor thinking cap vs the print vs consensus quick take stuff which is becoming less relevant here.
As for the big picture biz stuff, all I am really arguing is there is evolution going on in the narrative...
Mclovin Act 1: 2022-2025
Apple’s privacy reset created a rare window where probabilistic modeling + closed-loop feedback + supply aggregation mattered more than legacy identity. AppLovin executed flawlessly into that adtech abyss and built a dominant position (MAX distribution domination + Axon ML Black Box Perf Engine), culminating in a medallion esque quant fund cash machine. They stepped into a void and dominated, and people questioned the legitamacy every step of the way because such profitability only is supposed to be found with the likes of Flaming Dragon and other illicit businesses.
Mclovin Act 2: 2026-
Buying Tiktok/Entering Ecommerce/CTV and navigating monopolist share in gaming UA. The way I see this unfolding from here is that the business can still be exceptional operationally, but the equity transitions to a different multiple regime because the moat narrative shifts from unassailable black box to durable but attackable platform seeking to battle new giants in the era of ai. The downside convexity for the stock is driven by reinvestment and margin risk, not by near-term demand softness. This is generally a struggle to get across to those trading the stock on headline prints as it smashes numbers and the likes of unity continue to look like children in the land of one giant.
Some key things that have recently changed for me to see it this way...
1) I started to think Mclovin needed 1st part data gravity to move the ball fwd from here and honestly Tiktok was the perfect fit. I really wanted that deal to happen and when it became clear that asset was not going to them that changed a lot for me. I also think the fact they formally bid for this signaled quite clearly that Adam understands the challenges ahead.
2) AI Magic Human Capital was a big part of my thesis when defending this name against short attacks. The nio 100x ml engineer narrative fit very nicely then, but AI mania has changed all that. Competitors in adtech have poachhed talent from Mclovin, and the best ML engineers in the world now work for Ai labs. This makes me feel like the moat here is now the mediation position and dominant incumbency which everyone has an incentive to chip away against.
3) On the call Adam was pressed specifically on Meta and bidding dynamics, and his position was essentially “we’ve seen more bidders enter and it hasn’t hurt.” He argues their modeling edge is now structurally ahead so kind of like fly swatting. I get that but I ain't arguing Meta wins tomorrow. Considering all the criticism of Mclovin, it was fascinating to hear Adam basically say that deterministic bidding is technically possible, but that violates Apple policy and thus not a concern. So, it's not that Meta can't do something, but rather they will play nice and won't. This is despite the fact that almost all their key tech was built by a key meta former ml engineer. This was very weak sauce to me and more fuel to the positioning fire against the stock for now. Zuck tends to find a way...
4) They argued that the mediation focus isn't their moat, but its demand side lock-in. MAX wins A/B tests by “a few % pts", not blowing others out.
The real lock-in is Mclovin is >50% of some publishers UA spend, and getting off MAX decays that. So, use can't leave! But isn't that exactly why a “neutral clearinghouse” narrative matters? CloudX doesn’t have to beat MAX mediation features; it just has to make “neutral auctions + neutral pipes” credible enough that publishers believe they can maintain demand access without being inside the Mclovin UA box.
Anyway, that's my 2c on this.