AppLovin Q1: Web-Based Catalyst 2025-2026; Apps Segment Divested is a Major Plus

AppLovin easily topped revenue and EPS estimates in Q1, but more importantly, the company is setting up for an additional under-reported catalyst with its web-based ad platform expected to launch its self-serve feature and scale with a wider pool of advertisers as the year progresses.

In addition, the company divested its App segment, which is the gaming assets portfolio, and is now a pureplay ad-tech stock. The high-growth and high-margin advertising business that ignited AppLovin’s strong returns over the past few years is now the company’s sole focus.

You’d be hard pressed to find a stronger stock in terms of fundamentals on the market today. There is plenty of runway left for this stock should the growth of 30%+ coupled with 80%+ gross margins and nearly 40% net margin continue. Consider that EPS grew triple digits this quarter and FY2026 EPS estimates are being revised higher by an astonishing $3.50 in incremental EPS.

In analysis below, we turn our focus to ways the company can sustain this growth on the top line and bottom line as we look at 2025 and beyond.

Ad Growth of 71% YoY

AppLovin reported 40.3% YoY revenue growth to $1.48 billion in the first quarter, beating consensus estimates by $100 million. This was AppLovin’s sixth consecutive quarter with revenue growth >35% YoY.

Advertising revenue increased 70.9% YoY to $1.16 billion, slowing slightly from 91% in the year-ago quarter. Management said growth was driven by continued enhancements in its AI ad engine, as well as the full quarter impact of its web-based ad solution even coming off the seasonally high e-commerce quarter in Q4.

For Q2, management guided Advertising revenue of $1.195 to $1.215 billion, pointing to 69.5% YoY growth at midpoint, maintaining its hypergrowth phase.

Management is still looking to explore CTV as a future growth channel, following its recent push into e-commerce, while the upcoming launch of its AI-powered self-service campaign management platform is expected to be both a catalyst for revenue and margins.

Given the Apps business is being divested, AppLovin will be reporting headline growth in the 60% range that is aligned with its Ads business rather than a mix of both. Consensus revenue growth estimates are much lower and show a sharp deceleration, as these comps still take into account revenue from the Apps segment . Thus, growth rates such as 20% in Q3 do not reflect the true performance of the business.

Apps revenue declined (14.4%) YoY to $325 million. AppLovin announced that it entered a definitive agreement to sell the segment to Tripledot Studios for $400 million in cash ($150 million at closing and a $250 million promissory note) and a 20% stake in Tripledot’s equity. The transaction is expected to close in Q2. This will transition AppLovin into an advertising pure-play.

Margins Show Continued Strength

Though AppLovin’s top-line growth is quite impressive, margins are where it shines, with gross margin surpassing 80% and operating margin reaching a new high. This combination of strong revenue growth and strong margins is driving exceptional operating leverage with triple-digit earnings growth.

Per management on the call: “Total revenue soared 40% from the same period last year to $1.5 billion, and adjusted EBITDA increased a remarkable 83% to an impressive $1 billion, achieving a fantastic 68% adjusted EBITDA margin […] Shifting to the Advertising business, we generated $1.16 billion in revenue and $943 million in adjusted EBITDA, achieving an incredible 81% margin.”

Gross margin expanded 5 points sequentially and more than 9 points YoY to 81.7%. Notably, AppLovin cut its cost of revenue by nearly (9%) YoY, from $294.1 million to $272.2 million, while still driving 40% total revenue growth and 70% advertising growth.

Operating margin remained above 44% for a third straight quarter at 44.7%. To put in perspective how strong these margins are, AppLovin would have a Rule of 40 score of 85% based on Palantir’s definition of revenue growth + operating margin, while Palantir had a score of 83%.

Post-divestment, AppLovin’s operating margin will look much different, given that Advertising’s current operating margin is likely much closer to 70%. Management talked about the Rule of 150 on the earnings call, reflecting the new fundamental structure of the company, with ~70% revenue growth and 70% operating margins:

“I don't know of any other tech company with the financial profile that we have and scale growing the way we are. I think it's on a Rule of 150 or something. And what we're focused on when we talk about priorities is how's 2026 going to be? How's '27 going to be?”

Net margin in Q1 was 38.8%, up more than 16 points YoY. AppLovin’s business model sees a high percentage of its operating income flow through to the bottom line, driving tremendous EPS growth as margins expand.

Adjusted EBITDA margin was 68%, well ahead of guidance for 63% to 64%, as adjusted EBITDA surpassed $1 billion. Advertising adjusted EBITDA margin expanded 8 points YoY and 3 points QoQ to 81%, with adjusted EBITDA of $943 million coming in nearly 16% ahead of guidance. Apps adjusted EBITDA margin was 19%, flat QoQ but up 4 points YoY.

For Q2, management guided for adjusted EBITDA of $970-990 million for an 81% margin.

EPS Grows Triple-Digits in Q1

AppLovin reported massive 149% YoY growth in GAAP EPS to $1.67, outpacing revenue growth by more than 3x. Looking ahead, EPS estimates have been revised significantly higher since our latest update in February, AppLovin: Expanding from Gaming to E-Commerce (and Beyond)AppLovin: Expanding from Gaming to E-Commerce (and Beyond).

Q2 EPS is now seen growing 125% YoY to $2.00, before rising to $2.16 in Q3 and exiting the year at $2.46.

This compares to February’s estimates for 60% growth to $1.43 in Q2, $1.66 in Q3 and $1.78 in Q4. This is a significant >38% increase for Q2 and Q4’s EPS, as AppLovin will benefit from a much leaner business model as an ad-tech pure play, with operating margins set to expand post-divestment to nearly 70%, aided by prudent cost management – sales & marketing expenses were down nearly (20%) YoY, R&D was down nearly (21%), and data center costs rose by just $30 million YoY on a $480 million increase in revenue.

For FY25, analysts now estimate AppLovin will generate $7.80 in EPS, up 72.3% YoY, with FY26 EPS rising 42% to $11.80. This is more than a $3.50 increase for FY26 since February’s $8.27 estimate.

Cash Flows and Balance Sheet

AppLovin’s cash flows are exceptional, with operating and free cash flow margins expanding to new records in Q1. Per the opening remarks: “In the first quarter, we generated $826 million in free cash flow, up a staggering 113% year-over-year. Quarter-over-quarter, our free cash flow grew 19%, representing an impressive 82% flow-through from adjusted EBITDA to free cash flow.”

Operating cash flow rose 112% YoY to $831.7 million for a 56% margin, expanding from a 51.1% margin in Q4 and nearly 19 points higher than 37.1% in the year ago quarter.
Free cash flow rose 113% YoY to $825.7 million for a 55.6% margin, expanding from 50.6% in Q4 and 36.6% in the year ago quarter.
Cash and cash equivalents decreased to $551 million from $741.4 million in Q4, though the closing of the Apps sale should help restrengthen its cash position. AppLovin also repurchased and withheld 3.4 million shares in Q1 for a total cost of $1.2 billion, funded primarily via free cash flow and a temporary draw on its revolving credit facility, which was already repaid.
Debt totaled $3.71 billion, and debt-to-equity ratio has surged from 3.4x last quarter to nearly 6.5x now, as AppLovin is now more highly levered due to the decrease in cash and increase in total liabilities from $4.78 billion to $5.13 billion.

Analyst Estimates Do Not Represent the Full Picture

Analyst estimates show very low growth because these are taking the combined business of gaming and ads, and basing growth on this whereas organic growth will be much higher.

While Q2 will still have five weeks’ revenue impact from gaming, Q3 and Q4 will be AppLovin’s first two quarters post-divestment, with consensus revenue growth of 20-23%.

However, organic growth for Advertising was guided at just under 70% in Q2, and expected to be 65% YoY in Q3 based on the current estimate for $1.38 billion in revenue, which aligns with trends for 15% QoQ growth from Q2’s guide. Revenue is expected to decelerate to 52% in Q4, though this comes against a 73% growth comp.

Looking at just the Advertising business, full-year revenue growth is projected at ~63.2% YoY to $5.26 billion, based on current guidance and estimates for 2H. This would value AppLovin at a rather pricey 23x PS for 2025, and if revenue grows 30% YoY in 2026 to ~$6.83 billion, AppLovin would be valued at 17.7x forward PS.

If AppLovin can lever strong execution, expansions into web-advertising and further into e-commerce, and better optimizations to its AI ad engine to drive 50% YoY growth in 2026, revenue would project out to $7.89 billion, or ~15.3x forward PS

On the bottom line, AppLovin is currently operating near a 40% net margin with some quarterly fluctuations, and Advertising’s strong operating margin profile will likely pull net margins to the high-50% to 60% range. Looking out to 2026, AppLovin could generate earnings of $11.85 on the 30% growth forecast, assuming a 58% net margin with ~10 million share buybacks. This would value it slightly above 30x forward PE. Based on the 50% growth forecast and similar net margin and buyback assumptions, earnings would project to $13.70, or growth of >72% YoY based on current FY25 estimates, valuing AppLovin at 26.1x forward PE.

Growth Catalysts for 2025 and Beyond:

In terms of executing a successful pivot, Applovin’s management team does not get enough credit. Mobile games are a business that has plateaued (that’s putting it nicely – it’s actually a market that has tanked). Applovin aggressively acquired mobile games and leveraged their mobile IP portfolio to build a formidable database of 1.4 billion users. By building an ad-tech business and acquiring AI engineering talent, the company was early to AI with its AXON 2.0 platform. The pivot is one of the boldest I’ve seen in a 15-year career in tech; on par with Lisa Su’s move to overtake Intel.

Here is a summary of AXON 2.0 from our previous analysis:

“The ad engine AXON 2.0 offers a monumental advantage to AppLovin as the company is ahead in the race for AI-driven advertising. AppLovin is also an arbitrage advertising platform, which means they can quantify the impact of their reach for advertisers by returning back to the advertiser what was spent or more within 30 days. If an advertiser spends $10,000 (or multiples of this), AppLovin is able to return that or more to the advertiser. The company is also unique in that it offers performance marketing for brands and direct-to-consumer. The Trade Desk primarily works with agencies, whereas AppLovin is attracting smaller and medium sized businesses that rely on performance. Most importantly, AXON 2.0 is an AI-powered advertising engine that is continuously improving. Every quarter and every year, AXON becomes more effective by ingesting more data that improves the model through self-learning.”

Looking into the future, however, the management team cannot rest on their laurels as gaming eventually hits its limit in inventory. Although 1.4 billion daily active users is impressive, at about half of what Meta has with its family of apps at 3 billion users, one could argue that gamers are only worth so much to a marketer as the demographic is narrower and more limited.

Applovin’s next moves are the following:

Branch out to e-commerce — This plays nicely into the restrictions AppLovin has with a cookie window to convert within 24 hours. Meaning, if a user converts beyond 24 hours, it is hard for AppLovin to verify attribution. Therefore, the company is less appealing to an auto advertiser where the buying decision is quite long compared to a T-shirt company.
Web-based advertising – mobile games are an app-based business, hence the name AppLovin. The company came to market in the mobile era, yet the company is not capitalizing on websites at this time.
Self-service Platform – although this goes hand-in-hand with the web-based advertising catalyst, it’s important to look at this feature separately as the onboarding of advertisers can scale more quickly once this feature launches. Given AppLovin’s ideal advertisers convert within 24 hours for products that are less than $250, self-serve platform is the only way forward that makes sense.
Go Global – this is not on the near-term product road map yet is a lever AppLovin can pull when the timing is right. The company is focused on the United States market, which is by far the most lucrative.

E-commerce Apps:

According to the CEO’s response to short sellers in February, the initial launch of the e-commerce platform has seen 600 advertisers with an annual run rate of $1 billion. In terms of increasing TAM (which is also related to the information below in the web-based advertising section), the company stated they are “sub-0.1% penetration in the market,” signifying a long runway.

Where the TAM is a bit constrained is Applovin has 24 hours on the attribution side to convert and this tends to perform best with products priced under $250.

“On web, we built the product to be self-attributing, so our own attribution platform. And it's not high turnover products. I mean, like, most products in the world are not selling something greater than $250. Our product — our models can go deliver something that's a couple hundred dollars within a few minutes of the ad being seen, and it it's happening quite often. I mean, obviously, scaled at the $1 billion run rate that I mentioned.”

You can read more about the e-commerce platform in our previous analysis here.

Web-Based Advertising and Self-Serve Platform

The breakdown of mobile versus web-based advertising in terms of ad spend is as follows.

Total Ad Spend in the United States: $309B per year
In-app advertising represents $165.9B per year
Mobile Web advertising represents $36.7B per year
Desktop advertising represents $106.B per year

Applovin is effectively increasing their TAM by 40% by adding web-based advertising. This will take time to scale yet given the strong start we’ve seen on the in-apps ad business, to increase TAM by 40% is certainly something that catches our attention.

In terms of how this plays out, Applovin’s goal is to see 10% of revenue from the web-based business once the self-service platform goes live:

“After we launched the self-serve model, that business could grow quite significantly and outpace that 10% metric that we provided previously. So, it's quite likely that it could represent a larger than 10% portion of the revenue this year.”

Once the self-serve platform goes live, Applovin’s ambition is to see a market penetration in web-based advertising on par with their penetration in mobile games. The following was stated regarding the roll-out happening toward the back half of the year: “And then, even more exciting, I touched on this in the talk script, we're finally going to be releasing our new dashboard to some select advertisers for feedback this quarter. That's a huge catalyzing effect. When we do go to a full self-service state, we're going to open up our platform from a very small amount of advertiser penetration to the entirety of the world being able to come on to our platform.”

The company also clarified that until the self-service platform launches, they will not see meaningful revenue in the web-based business, yet in the meantime, there is “a line out the door.”

“We've got a line out the door of customers that have been waiting to come on to the platform, and then we've onboarded, I think I said, in a blog, hundreds of advertisers, but our team is small. So, when I say we're not looking to push, we're looking to push over time, but we need to get the self-service tools into the market so that we can pair that with the team to automate a lot more of the processes.”

Short Reports:

The CEO responded to the short seller reports here and here. These are worth a read as the CEO makes the explanation quite simple in terms of how their pixel is not unique and is aligned with industry standards.

Conclusion:

There are no guarantees in tech investing. Stick around long enough and you will see a bulletproof company fall flat (pick any high-flying best-of-breed cloud company – Zoom, Snowflake, Datadog, MongoDB), while others surprise the market for a decade or longer (Meta, Google, etc.).

Applovin gushes margins, has many catalysts to continue its growth trajectory and perhaps most importantly, is an underdog of sorts to where the market often (mistakenly)- affords a better entry in time. I won’t get any originality points for writing an analysis on Applovin after an 800% run in the markets in eighteen months, yet perhaps I can help by saying that from what I can see today, this run is not over yet.

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Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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