AppLovin: Can 80% Margins Survive Outside Gaming?

Yahoo

24-06-2025

AppLovin (NASDAQ:APP) has gone from a relatively unknown ad-tech solution provider to a $110 billion mobile marketing powerhouse in less than three years, reshaping how app developers acquire users and monetize their products. Its pivot away from first-party games and toward a pure platform model has sharpened margins and heightened market attention, but it also sets a high bar the platform must keep clearing.
Warning! GuruFocus has detected 3 Warning Sign with APP.
In this article, I analyze the company's business evolution, unpack its platform economics, test whether the current financial trajectory warrants today's premium valuation, and finish with where I believe the stock can go next.
AppLovin began as a hybrid model, operating both a software platform for mobile app marketing and a portfolio of its own mobile games (Apps segment). This dual structure allowed AppLovin to bootstrap its advertising algorithms with first-party data from its games, but it also meant the company was part game publisher and part ad-tech provider. In 2024, the Software Platform (Advertising) segment contributed about 68% of revenue, while the Apps (gaming) segment was 32%. However, advertising revenue grew 75% year-over-year (YoY) in 2024, whereas Apps revenue grew only 3%. This trend accelerated into early 2025. In the first quarter of 2025, advertising revenue soared 71% YoY to $1.159 billion, while Apps revenue fell 14%. Clearly, AppLovin's future lies in its high-growth ad-tech platform.
With that in mind, management made a strategic move of divesting the entire Apps segment. AppLovin announced an agreement to sell its mobile gaming portfolio (about 10 studios and hit titles like Cash Tornado and Wordscapes) to Tripledot Studios for roughly $400 million in cash and around a 20% equity stake in Tripledot. CEO Adam Foroughi said while acquiring game studios years ago helped train AppLovin's machine learning models, we have never been a game developer at heart. In other words, AppLovin's core identity is as a technology platform for app monetization and marketing, not as a content creator. By divesting the games, the company sheds a slow-growth, lower-margin segment. The sale also eliminates any conflict of interest with its clients (third-party app developers). They may have been wary of relying on an ad network that also owned competing games.
Source: AppLovin
At its core, AppLovin offers an end-to-end software platform that helps app developers acquire users and monetize their apps. Key components include AppDiscovery (user acquisition campaigns), the AppLovin Exchange (ad network marketplace), and MAX mediation (the leading in-app bidding platform that maximizes ad revenue for publishers). AppLovin's secret sauce is its data and AI engine, dubbed AXON. AXON is a sophisticated machine learning system that ingests billions of data points from across AppLovin's network (ad impressions, clicks, installs, and in-app events) to optimize advertising in real time. Because AppLovin historically operated its own games and, critically, owns the mediation layer (MAX), it enjoys a rich stream of first-party data with every ad impression and user action. This vertical integration (ad network + mediation + first-party content) created a closed loop of data that competitors struggled to match.
Another critical piece of AppLovin's platform dominance is MAX, its in-app bidding mediation. MAX allows multiple networks to bid in real time for each ad impression, unlike the old waterfall systems.
Source: Appsflyer
Developers prefer MAX because it yields higher fill rates and revenue. AppLovin acquired the MAX technology in 2018 and later bought MoPub (a rival mediation platform) and shut it down, forcing MoPub's clients to migrate. Mobile developers use MAX for monetization (AppLovin effectively owns the pipes for in-app ads). This gives AppLovin a privileged position as it takes a cut of the ad spend flowing through MAX and gains real-time visibility into global ad demand and supply. Coupled with AXON's algorithms, AppLovin can dynamically route and price ad impressions to maximize yield. The result is a virtuous cycle: better monetization for publishers attracts more apps to MAX, which gives AppLovin more data and ad inventory to attract advertisers, which in turn increases competition (and prices) for those ad slots, benefiting publishers and AppLovin.
This cycle is evidenced by AppLovin's exceptional margins (more on that later) and its ability to keep customer acquisition costs low. With so much first-party data and automation, AppLovin can find and convert users at a lower cost than rivals. Its traffic acquisition costs (what it pays to acquire users or impressions) are relatively low compared to the revenue it earns, as shown by its high gross profit.
Management noted that post-sale, some of the $1.5 billion of TTM Apps revenue will effectively be replaced by additional Advertising revenue (Tripledot becoming a client). Not one-for-one, but part of that revenue will return as platform fees. More importantly, profit margins will improve dramatically with the low-margin gaming operations gone.
Looking ahead, AppLovin's entire business will be its Software Platform, and growth will come from capturing more advertising spend in the mobile app ecosystem and beyond. The company is already exploring new verticals: AppLovin invested in Connected TV (CTV) advertising through its Wurl subsidiary.
New products like Wurl's AdPool (to connect streaming TV channels with advertisers) and TVBits (an AI-driven content recommendation app for CTV) indicate AppLovin's ambition to extend its ad tech into streaming video. The retail media space and OEM partnerships (pre-loading apps on devices via its Array product) are also on the radar. These expansions leverage AppLovin's existing strengths in user acquisition and monetization, applied to new arenas. They also diversify the business beyond mobile gaming, tapping into broader app categories (shopping, lifestyle, etc.) and geographies. About 43% of AppLovin's revenue already comes from outside the U.S., with strong relationships in East Asia. There is still room to grow internationally in regions like Latin America, the Middle East, and India as smartphone usage and app economies expand.
AppLovin operates in a competitive field that includes independent ad-tech companies and divisions of larger tech firms. Key rivals in the mobile app advertising niche include Unity (NYSE:U) (which acquired ironSource in 2022), ironSource itself (now part of Unity), Digital Turbine (NASDAQ:APPS), and big players like Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) AdMob/Firebase. Despite formidable peers, AppLovin has carved out a leadership position through operational superiority and strategic aggression.
Consider Unity Software, a well-known company for its game development engine used by countless mobile games. Unity also runs an ad business (Unity Ads and the Unity LevelPlay mediation platform, created from the ironSource merger). However, Unity's financial and operational metrics lag far behind AppLovin's. In 2024, Unity's total revenue (including its Create segment for engine licenses) was $1.8 billion (actually down 17% from 2023). Unity remains unprofitable (a net loss of $664 million in 2024). By contrast, AppLovin's 2024 revenue was $4.7 billion (growing 43% YoY) and it generated $1.6 billion in GAAP net income. In the pure ads business, AppLovin likely generated well over 3x the revenue of Unity's ads division, and with much higher margins. Because AppLovin owns the mediation layer (MAX) and previously operated its own games, it enjoys real-time, first-party data on user interactions and ad performance. This is a crucial advantage as competitors like Unity historically relied on third-party mobile measurement partners for attribution data, which could be delayed or error-prone. In fact, Unity suffered an incident in 2022 where bad data from an external partner corrupted its ad targeting models, causing a major revenue shortfall. Moreover, while Unity's core strength is in game creation tools, AppLovin's sole focus is monetization and marketing, allowing it to execute with singular purpose. Many developers actually mix and match. They might build a game in Unity's engine, but use AppLovin's MAX and ad network to monetize, because AppLovin delivers better results.
In 2022, AppLovin made a surprise bid to acquire Unity (contingent on Unity dropping the ironSource deal). Unity rejected it and instead proceeded to merge with ironSource, but integrating those businesses has taken time, while AppLovin surged ahead.
Outside of these, Digital Turbine (which specializes in pre-loaded apps and phone carrier partnerships) competes in a related area of app distribution. AppLovin has started encroaching on Digital Turbine's turf with its Array initiative, partnering with OEMs/carriers to get apps recommended or pre-installed on devices.
There are also the giants to consider: Google and Meta (NASDAQ:META) run enormous ad networks that include mobile inventory. Google's AdMob is widely used by small developers and benefits from easy integration with Android/Play Store, and Facebook's ad network (via its SDKs in apps) is also significant. However, these giants primarily leverage their own data and tend to focus on user-level targeting across apps. AppLovin's advantage is in-app contextual and behavioral data at scale within its network, plus the mediation control. While Google and Facebook aggregate demand from advertisers, AppLovin uniquely sits at the intersection of aggregating supply (via MAX) and demand (via its ad clients), giving it a degree of control and insight neither Google nor Meta have within the in-app ecosystem specifically.
Beyond specific competitors, the broader moat AppLovin has is rooted in its scale, data, and outcomes. The company provides advertiser access to roughly 1.6 billion daily active users. It effectively monetizes a large portion of the mobile ad economy.
The switching costs for developers are real. Once a game studio implements MAX and optimizes their monetization around AppLovin's stack, ripping it out for an alternative could jeopardize their revenue. AppLovin's algorithms continuously learn from a vast pool of ad campaigns and user interactions. A competing platform would need to show materially better results to convince developers to switch, in my opinion. As long as AppLovin continues to deliver superior monetization (higher ad prices, fill rates, and efficient user acquisition), its clients have little reason to leave.
In mobile gaming ads, AppLovin has played on both sides (advertiser acquisition and publisher monetization) to entrench itself. Advertisers' bids flow through the AppLovin Exchange (which supports real-time bidding). AppLovin takes a cut of the ad spend as revenue and because AppLovin owns the mediation layer (MAX), it sometimes functions as the auctioneer for ad inventory, giving it the advantage of seeing all bids and charging rival networks a fee to participate. Developers want to be where the demand is, advertisers want to be where the supply is. AppLovin's vertical integration was once questioned (running its own games was seen as a conflict), but now that it's a pure platform, the trust with third-party developers should only increase, potentially widening its moat.
AppLovin's financial results over the past year underscore the success of its strategy. In 2024, revenue hit $4.709 billion, up 43% YoY, and adjusted EBITDA reached $2.72 billion, a 58% EBITDA margin. This was driven by the advertising segment's rapid expansion (75% growth in 2024) while the apps segment stagnated. AppLovin's profitability improved dramatically as revenue grew. By maintaining discipline on costs, the company achieved strong operating leverage. Net income was $1.579 billion, a sharp increase from the prior year of $357 million. This growth continued into 2025.
Source: Gurufocus
In Q1 2025, AppLovin exceeded expectations. Total revenue was $1.484 billion, up 40% YoY and about $100 million above management's guidance for the quarter. Advertising revenue was $1.159 billion (+71% YoY), while Apps revenue was $325 million (-14% YoY). The fast growth of the ad business more than compensated for the decline in games. Profitability was remarkable. Adjusted EBITDA was $1.005 billion for Q1 (67.7% margin on total revenue). This was up 83% from the prior year's quarter, indicating not just growth but accelerating operating profit. Even on a GAAP basis, net income was $576 million for the quarter (a 39% net margin), more than double Q1 2024's net income. These figures are astounding for a company that, not long ago in 2022, saw its profits dip amid industry headwinds but were able to rebound and then some. We're now looking at a business with run-rate EBITDA of over $4 billion/year if we annualize Q1 (though Q1 likely benefited from seasonal strength and easy comparisons).
Cash flow mirrored this performance. In Q1 2025, operating cash flow was $832 million and free cash flow (FCF) was $826 million. Essentially, all operating cash turned into free cash, as capital expenditures are minimal for this software-centric business. AppLovin's Rule of 40 score is extraordinary. Last quarter, it hit 96, a figure I haven't seen elsewhere, and it wasn't a one-off. In the last 5 quarters, the minimum value it achieved was 85 in Q3 2024.
Looking at the balance sheet, the company carries more debt ($3.7 billion) than cash and cash equivalents ($0.55 billion), but net leverage remains modest (1.13 net debt/TTM EBITDA). With the kind of cash flow discussed, AppLovin could deleverage quickly if it wanted, but instead, management has prioritized buybacks. The games sale will bring in $150 million cash at closing plus a $250 million promissory note (paid over time), further bolstering resources.
AppLovin's board had authorized sizable buybacks, and they've been executing. In Q1 2025 alone, the company repurchased 3.4 million Class A shares for $1.2 billion, a 1% reduction in its shares outstanding.
Management guided Advertising revenue of $1.205 billion mid-point for Q2 (70% YoY) and Advertising adjusted EBITDA of $980 million, which is an 81% EBITDA margin at the midpoint. That implies the core ad business is scaling margins even further (some seasonal favorability and maybe one-time efficiency, but still). They stopped providing guidance for the Apps segment entirely (since it's being sold). So, investors should expect reported consolidated revenue to dip once the sale closes (losing a few hundred million per quarter of games revenue), but earnings will be far less affected and margins will be much higher.
AppLovin's share price has surged roughly 300% over the past twelve months, although it is down 2% year-to-date. Despite an incredible climb, the company's fundamentals have tracked the stock price rather than hype, reflecting a business that continues to expand revenue, widen margins and compound free cash flow at a pace few peers can match.
Source: Author
Despite its high growth, profitability has been growing rapidly, and the stock isn't ridiculously expensive as one might think.
With the stock at $324 per share, traditional multiples such as price-to-sales (P/S) and price-to-earnings (P/E) are above its peers, however, the PEG ratio (PEG can reveal whether a seemingly high P/E is justified by rapid expansion) is the smallest among its peers at 0.7x (the lower the PEG, the better). Bear in mind that on headline numbers, revenue growth will decelerate to roughly 20% as the Apps segment disappears, but organic advertising revenue is still compounding well above 60%. YoY. Moreover, the divestiture should expand margins, something Wall Street loves.
To me, the key takeaway is that AppLovin remains one of the most richly valued names in the advertising sector, but it also offers one of the strongest growth profiles and competitive moats.
AppLovin's total addressable market is vast and still largely untapped. Industry researchers at IMARC value the global in-app advertising market at $191.8 billion in 2024 and forecast it to reach $821.8 billion by 2033, a 16% CAGR. Jefferies calculates that AppLovin serves fewer than 1,000 web advertisers today, roughly 0.1% of its own addressable universe, underscoring how little share the company has captured outside gaming. That backdrop has drawn mixed reactions from noted investors. Major gurus such as Frank Sands (Trades, Portfolio) and Baillie Gifford (Trades, Portfolio) have increased their position in AppLovin significantly. Also, Jerome Dodson (Trades, Portfolio) and Chris Davis (Trades, Portfolio) have initiated positions in the stock. On the other hand, Ray Dalio (Trades, Portfolio) has reduced his position almost to zero.
Another potential catalyst for changing market perception is the potential index inclusion. AppLovin's market cap and profitability now meet many criteria for the S&P 500. Indeed, there was speculation in mid-2025 that it might be added to the S&P during an index rebalancing (especially after it sustained profitability and the stock price climbed). As it wasn't included in the June 2025 shuffle, it caused a brief sell-off in the stock. Inclusion in the S&P 500, should it happen in a future rebalance, would be significant as it forces index-tracking funds to buy the stock (creating natural demand) and often confers a sort of validation on the business. I view eventual index inclusion as likely if AppLovin continues to execute.
AppLovin's biggest vulnerability remains its dependence on the iOS and Android duopoly. Any further tightening of Apple's (NASDAQ:AAPL) identifier access or Google's forthcoming Android Privacy Sandbox could still curb data precision and slow growth while new probabilistic models retrain.
Competitive pressure is a close second. Unity is integrating ironSource, Google could strengthen AdMob's mediation, and TikTok or another platform could siphon advertiser budgets if they can match AppLovin's return-on-ad-spend outcomes.
The third risk is execution in new verticals. E-commerce, connected-TV and OEM app distribution expand the addressable market but demand different integrations, sales motions and bring new competitors.
The fourth risk is headline volatility. High-flying stocks tend to attract short-seller attention, and those reports, regardless of substance, can shake the market. Personally, I find these short-seller reports ethically dubious, yet they undeniably move prices. In June 2025, Culper Research issued its second critique in four months, alleging undisclosed links between AppLovin and Chinese partners. The shares fell roughly 15% intraday before management's rebuttal and the subsequent earnings release erased the drop, underscoring how even unproven allegations can trigger sharp if temporary drawdowns.
Finally, macroeconomic cyclicality also matters. Performance marketing budgets are sticky relative to brand spend, yet a global downturn or a sharp pull-back from key Chinese or mid-market U.S. advertisers would test the company's ability to keep volumes growing fast enough to defend today's premium valuation.
AppLovin crossed the line from unprofitable to a high-margin platform. In two years, it went from GAAP-unprofitable to net margins above 30%. Advertising revenue rose 71% YoY in the latest quarter, adjusted EBITDA margin sits above 67%, and management guides the core platform to an 81% margin as the low-growth games division exits. Net leverage is roughly one times EBITDA, and FCF exceeded $2.5 billion TTM, achieving a Rule of 96 score.
Today's valuation looks expensive at first glance, but under the hood shows a different picture. In my opinion, the data moat created by MAX mediation and Axon's self-learning models gives AppLovin a clear path to maintain out-sized return-on-ad-spend for clients, which in turn should keep budgets migrating toward the platform and allow revenue growth to outpace the broader mobile ad market for several more years. The same discipline that led management to cut head-count in 2022, spin off the apps portfolio in 2025 and buy back stock at opportunistic prices underpins my confidence that they will protect margins as they scale into new verticals. In my opinion, the stock should outperform the market if management keeps executing.
This article first appeared on GuruFocus.