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AppLovin (APP) is making a name for itself in mobile advertising. In fact, the company is going all in. The digital advertiser’s flagship AI platform, AXON, enables auctions at a vast scale and microsecond speed. The platform also matches advertiser demand with publisher supply, helping advertisers maximize the return on their advertising spend. So far, the results have been superb.
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Earlier this week, AppLovin published its Q1 2025 earnings, boasting about AXON’s growth and operating leverage. Advertising revenue grew 71% year-over-year to $1.16 billion in the first quarter, with AppLovin going “all in” on digital advertising. Moreover, the tech company recently announced its intention to sell its less profitable and declining mobile gaming business for $400 million in cash, while still maintaining a 20% equity stake. The confluence of factors makes me cautiously bullish on APP stock.
AppLovin’s Strategic Exit from Mobile Gaming
For those unfamiliar, AppLovin’s AXON platform marks an evolution from its mobile gaming origins, leveraging AI to deliver real-time data analysis and highly efficient ad targeting. Unlike traditional ads in newspapers, TV, or billboards, where reach was broad but untargeted, today’s digital landscape enables precise targeting. AXON capitalizes on this shift with predictive algorithms and a self-learning loop that continuously refines its models, creating a flywheel effect: the more data it processes, the smarter and more effective it gets.
Early results show that AXON resonates with customers. In Q1, AppLovin’s advertising segment posted $943 million in adjusted EBITDA, an impressive 80% margin, meaning 80 cents of every dollar flows straight to the bottom line. Free cash flow reached $826 million, a robust 55% margin even by software standards. Further underscoring its pivot, AppLovin sold its mobile gaming business for $400 million, betting big on AXON’s future.
Looking ahead, the company projects sequential growth in Q2, with ad revenue expected to hit ~1.2 billion and an 81% adjusted EBITDA margin. Despite these strong numbers, AppLovin is just starting to grab share in the broader ad market, with plans to expand into web advertising and beyond.
Valuation and Competitive Risks
AppLovin’s stellar numbers have propelled it into the ranks of leading tech players, now boasting a market cap in excess of $100 billion. But with that success comes sky-high expectations. The stock trades at a P/E ratio of 67 — nearly three times the sector median — signaling that investors are pricing in near-flawless execution and continued strong performance. As AppLovin’s market share grows, sustaining its rapid pace will inevitably get tougher.