Applovin: Short sellers taking turns? Can't beat the stellar performance

$AppLovin(APP.US) released its Q1 2025 earnings report after the U.S. market closed on May 7, Eastern Time. Despite facing pressure from five short reports, Applovin delivered a "both expected and unexpected" strong performance, striking back hard at the shorts.

Key highlights:

1. Solid guidance, e-commerce defies the trend: For Applovin, Dolphin Research remains most concerned about guidance. Despite the barrage of short reports, the impact on actual performance may be minimal. For clients, the proof is in the pudding—ROAS speaks for itself.

Since the beginning of the year, both the industry and macroeconomic environment have seen changes. In the gaming industry, developers still favor in-app purchases over ad monetization; macro factors are mainly constrained by tariffs, which isn’t good news for Applovin, which is primarily telling an e-commerce story this year.

But the reality is, the company’s Q2 revenue guidance (excluding sold 1P apps, covering only the former "software service revenue," i.e., ad revenue) implies growth in the 68-71% range, with almost no slowdown from Q1.

Breaking it down based on market and Dolphin Research’s expectations (for reference only):

(1) Q1 e-commerce ad revenue is estimated to exceed $200 million, up nearly 200% QoQ, showing relatively smooth progress. Other ad revenue (e.g., gaming) grew 37% YoY, far outpacing the industry’s single-digit growth, with peers under pressure (Meta mentioned a clear slowdown in Q1 gaming ad revenue; Unity Grow saw a 4% decline despite Vector’s incremental contribution). Applovin continues to dominate.

(2) Q2 e-commerce revenue is expected to approach $300 million, another 30-50% QoQ growth, with other ad revenue (e.g., gaming) growing nearly 30%. Needless to say, it remains the leader.

2. Profitability significantly beats expectations: Returning to current performance, revenue exceeded consensus by nearly $100 million, driven by ads. EBITDA margin rose to 68%, up 7 ppts QoQ.

The profit boost mainly stems from a business mix skewing toward higher-margin ads and significant operating expense cuts. Cost optimization likely came from 1P game studio layoffs ($6.6 million in restructuring costs) and reduced server bandwidth costs (down nearly 40% QoQ).

In early May, the 1P app business (games) was sold to Tripledot Studios (a casual mobile game company focused on card, puzzle, and match-3 genres) for $400 million cash + 20% equity in Tripledot. With Tripledot reportedly valued at ~$1.4 billion, the deal implies a ~$700 million valuation, a discount to last quarter’s $900 million estimate. The transaction included ~$190 million in goodwill impairment.

Post the May divestiture, Q2 guidance reflects only the ad business’s profitability. EBITDA margin for ads remained at 81% QoQ. At this high level, further improvement will be challenging.

Thus, future profit growth will largely depend on business expansion.

3. Ramped-up buybacks to support the stock: During the short-attack-driven selloff, the company aggressively repurchased shares—$1.2 billion spent in Q1 (including fees and taxes), equivalent to 40% of last year’s total. It bought back 3.4 million shares for cancellation. Shares outstanding dipped slightly to 338 million by Q1-end.

Based on net cash and FCF, assuming buybacks grow in line with profits (~$4 billion), this implies a 3.8% shareholder yield—rare for a high-growth company.

Dolphin Research believes that, rather than shareholder returns, we’d prefer Applovin to reinvest in growth, as its valuation hinges on the high-growth narrative.

4. Key financial metrics

Dolphin Research’s take

This is a report card that’s both expected and unexpected.

"Expected" because, given its "stable gaming ad dominance + e-commerce ad push," Dolphin Research never doubted Applovin would deliver solid Q1 results, largely unfazed by short reports.

"Unexpected" because we didn’t anticipate such strength—not just in ad revenue but also in profitability. Q2 ad revenue guidance also surpassed expectations, with growth barely slowing. In today’s macro climate, this is remarkable. Compared to Unity’s woes, it’s clear fortunes diverge.

However, the "shadow" of short attacks lingers. While commercial behavior (absent illegality) is a market choice—whether clients accept it or rivals attack it—the exposure of Applovin’s "black box" tech has somewhat demystified its high ROAS, especially the AI narrative. This is the key hurdle preventing Applovin from achieving Palantir-like "mythic" valuations.

Pre-earnings, Applovin had reclaimed a $100 billion market cap, but the post-earnings pop of just 14% is notably weaker than past beats. This suggests the short attacks have taken a toll. Otherwise, a 20% rally (from pre-earnings 25x Non-GAAP EV/EBITDA) wouldn’t be outrageous.

Based on Q1 trends, Dolphin Research expects 2025 e-commerce ad revenue could hit $1 billion. If other ads grow 20-25% organically, full-year ad revenue may reach $4.8–5.1 billion. Extending this, 2026 ad revenue could be $6.2 billion, with ~80% Adj. EBITDA margins (~$5 billion EBITDA). At a $116 billion post-pop market cap, this implies 23x 2026 EV/EBITDA. While higher than most ad peers, this still seems low for a 25–30% 3-year CAGR.

The key question is whether e-commerce ads can sustain effective conversions beyond one-off tests by impulsive advertisers. If not, and gaming ads grow just 20% organically, post-restructuring profit tailwinds may not justify the current 29x EV/Non-GAAP NOPAT (2026) multiple.

Detailed analysis below

I. Defying shorts, e-commerce outperforms

Q1 revenue hit $1.48 billion, up 40% YoY (slightly decelerating from last quarter’s high base). Beating the $1.385 billion consensus (aligned with guidance), this was a clear upside surprise.

Ad revenue (formerly "software services"), the bulk of sales, grew 71% to $1.16 billion—the main beat. 1P app revenue missed, but with the May divestiture, this was already in runoff mode.

Despite e-commerce contributions, ~90% of ad revenue still comes from gaming and general software. But gaming has been sluggish, and since 2H 2023, rising CPMs (driven by e-commerce) have hurt ROI, pushing game firms toward in-app purchases.

Q1’s marginal consumption weakness exacerbated ad budget cuts. Per surveys, game developers’ 2024 ad spend growth expectations dropped sharply from late 2023, reverting to low single digits.

Peers seem more aligned with industry trends—e.g., Unity noted Vector-driven gains couldn’t offset legacy declines. Meta also flagged a clear gaming ad slowdown on its Q1 call. April’s tariff tensions further cloud the macro outlook, weighing on game advertisers and Applovin’s e-commerce narrative.

Yet Applovin seems in a league of its own—e-commerce is progressing smoothly, while traditional gaming ads grow 37% YoY, crushing peers. Dolphin Research’s estimates:

(1) Q1 e-commerce ad revenue likely topped $200 million, up ~200% QoQ. Other ads (e.g., gaming) grew 37% YoY, far outpacing peers.

(2) Q2 e-commerce revenue may near $300 million (another 30-50% QoQ), with other ads up ~30%. Still the clear leader.

II. Selling 1P games, fully transitioning to an "easy money" ad platform

Q1 EBITDA margin hit 67.7%, beating expectations, with the upside mainly from aggressive 1P cost cuts pre-divestiture—making overall margins more ad-like.

For instance, 1P studio layoffs ($6.6 million restructuring costs) and game shutdowns slashed server bandwidth costs (~40% QoQ).

The May sale to Tripledot (for $400 million cash + 20% equity, implying a ~$700 million valuation vs. last quarter’s $900 million) included ~$190 million goodwill impairment.

Ad EBITDA margins held steady at 81% in Q1. At this level, further gains are unlikely.