Applovin: All tricks exhausted, what will the advertising overlord use to amaze the audience?

$AppLovin(APP.US) released its Q2 2025 financial report after the U.S. stock market closed on August 6th, Eastern Time. Although it still showed impressive high growth, it was only roughly in line with expectations.

For AppLovin, which has consistently exceeded expectations, an inline performance is considered unsatisfactory and is unlikely to boost the stock price, which has already risen nearly 30% since the Q1 report.

Specifically:

1. Growth Guidance is "Unremarkable": For AppLovin, Dolphin Research is most concerned about guidance, especially in the early stages of e-commerce advertising. The growth rate guidance to some extent indicates whether the current progress is smooth, which is quite important for AppLovin, which is still valued for its growth potential.

The actual Q2 guidance is mediocre, roughly in line with the recently raised expectations of some investment banks. Excluding advertising expenses for its own apps (estimated at $25-30 million), the guidance implies a significant slowdown in Q3 year-over-year growth compared to Q2 (from 73% to 60%), although it still tries to maintain within the medium-term growth guidance range of 5% quarter-over-quarter.

2. The Peak of E-commerce Advertising Has Not Yet Arrived: Q2 was still in the closed testing phase for e-commerce advertising, and its contribution to this quarter's revenue is expected to be minimal. According to research, AppLovin currently reaches 20% of its target customer base, with penetration progress limited by the sales team. The willingness of some major advertisers to increase spending at the end of the quarter is uncertain, but has recently improved.

In the second half of the year, the market expects the automated delivery system to go live at the end of Q3 or the beginning of Q4. Meanwhile, AppLovin will lower the GMV threshold (previously set at an annual GMV of $10-250 million for target customers) to attract more small and medium-sized businesses to participate in testing and cooperation.

At that time, advertising revenue growth may experience another small peak. (If there are positive descriptions in the earnings call, it may alleviate dissatisfaction with the guidance.)

However, further scaling up will require seeing tangible advertising conversion results, especially empirical data on the conversion chain from clicks to actual GMV payments. Whether satisfactory e-commerce advertising conversion rates can be achieved in gaming scenarios remains a long-term debate.

3. Strengthening Advertising Monetization is Not Easy: After divesting low-efficiency 1P gaming apps, the company's profit is essentially the profit margin of advertising itself. Comparatively, a 76% GAAP operating profit margin and an 81% EBITDA profit margin are already quite high.

At the same time, to further accelerate the penetration of e-commerce advertising, developing the e-commerce advertising system requires continuous investment, and AppLovin needs to expand its sales team (currently small in number), which means R&D and sales expenses will continue to grow in the short term, leaving little room for profit margin optimization.

4. Buybacks Decrease, Favoring Growth Investments: Last quarter, the company conducted significant buybacks, mainly due to continuous bearish sentiment causing a sharp stock price correction, prompting the company to undertake large-scale buybacks in response.

This quarter, with the stock price stabilizing, the buyback intensity has significantly decreased quarter-over-quarter. The company is allocating more funds to business operations investments rather than simply retaining or distributing them to shareholders, which is more beneficial for the current growth stock logic. In Q1, 900,000 shares were repurchased, costing a total of $400 million, implying an average price of $378 per share.

5. Key Financial Indicators Overview

Dolphin Research's View

Having been accustomed to AppLovin's earnings reports exceeding expectations, this inline performance is indeed a bit surprising and disappointing.

In the past month, market expectations have also been somewhat conflicted. In June, due to slightly slow progress in e-commerce as reported by channels, especially as major merchants temporarily halted additional investments, there were market concerns about AppLovin experiencing "cultural acclimatization" issues in cross-industry operations.

However, as major merchants' spending stabilized and AppLovin planned to lower the GMV threshold and launch an automated delivery system to further accelerate the penetration of the current customer base, market sentiment rebounded, with the stock price rising by 20% in July.

At this time, AppLovin is still in a period where it can control its progress and reap benefits, so market attention to Q3 guidance is paramount. How Q3 performs indicates the company's internal pace in (1) lowering the threshold to accept small and medium-sized enterprises, and (2) product promotion and development.

However, the "unremarkable" Q3 guidance (quarter-over-quarter growth slowing from 9% to 6%) does not yet indicate that the scale of e-commerce advertising is starting to increase, and attention can be paid to the management's explanation in the conference call.

As with the previous quarter's judgment, Dolphin Research believes: The slow progress in e-commerce in the short term has objective reasons (tariffs, the sales team needs further expansion), which means that AppLovin still has the potential to exceed expectations in monetization in the e-commerce field.

But from a medium to long-term perspective, how to achieve real delivery conversion through advertising in gaming scenarios still requires further observation. The latter mainly affects the scale increase; otherwise, it can only obtain promotional budgets from e-commerce advertisers or non-e-commerce clients, which significantly reduces the TAM compared to the vast e-commerce advertising scale.

In terms of valuation: Assuming a 20% growth in gaming advertising as guided by the company in 2026, e-commerce revenue of $200 million in Q2, with a 20% quarter-over-quarter growth, annual revenue of $1.3 billion (officially disclosed, current e-commerce advertising clients have an annualized turnover of $1 billion), total advertising revenue of $6.8 billion, a year-over-year growth rate of 32%, achieving $5.4 billion in profit at an 80% EBITDA profit margin, and a neutral to optimistic valuation range of 25x-30x, corresponding to $135-162 billion.

The current market value is at the lower end of the range, and it is appropriate to remain moderately positive before the automated delivery tool is officially launched.

Below is a detailed analysis

I. "Unremarkable" Growth Guidance

In Q2, AppLovin completed the divestiture and sale of its own app business, so the company's revenue is now primarily composed of advertising. Q2 achieved total revenue of $1.26 billion, with an intrinsic growth rate of 77% for advertising, accelerating compared to Q1.

Due to the macroeconomic environment, the contribution of e-commerce incremental growth in Q2 was minimal, mainly driven by the recovery of the casual gaming industry. According to Sensor Tower data, the global mobile gaming market is expected to grow by 6% in Q2, with a 20% year-over-year growth in China.

The company's guidance for next quarter's revenue is $1.32-1.34 billion, with a comparable growth of about 60%, showing a significant slowdown compared to Q2. This guidance basically aligns with the raised market expectations but clearly does not match AppLovin's usual pattern of significantly exceeding expectations, especially as buy-side investors are unlikely to be satisfied.

II. Profits are Extremely High, but May Not Be Sustainable

In Q2, the company achieved an overall EBITDA profit margin of 81%, which represents the pure advertising profitability level, with the closed-loop ecosystem advantage of a pure intermediary, resulting in an extremely high profit margin.

However, this profit margin is likely to be unsustainable as the e-commerce sector penetrates further.

On one hand, the e-commerce advertising system requires continuous development investment, and AppLovin's underlying data and terminal functions need to be adjusted to a version suitable for e-commerce clients.

On the other hand, AppLovin needs to rapidly expand its sales team (currently small in number), which means R&D and sales expenses will continue to grow in the short term, leaving little room for profit margin optimization.

Additionally, as a new player entering the e-commerce field, AppLovin's closed-loop ecosystem cannot be fully developed. Therefore, the value that can be extracted from the industry chain naturally needs to be shared with others.

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Dolphin Research's Historical Studies on "AppLovin"

Financial Reports

May 7, 2025, Conference Call Minutes "AppLovin (Minutes), Clients Waiting in Line to Join"

May 7, 2025, Financial Report Commentary "AppLovin: Bears Take Turns, Can't Beat the Impressive Results"

February 12, 2025, Conference Call Minutes "AppLovin (Minutes): Can Technology Really Meet Cross-Market Demand?"

February 12, 2025, Financial Report Commentary "Surging 30%! How Did AppLovin Beat the Bears?"

Hot Comments

March 30, 2025, Short Report Commentary "Muddy Waters Also Hammered! Is AppLovin Really a "Flawed Egg"?"

February 28, 2025, Short Report Commentary "60% Discount Bloodbath, Is AppLovin Guilty to This Extent?"

In-Depth

January 10, 2025, Initial Coverage Part II "Copying the Gourd, Can Unity Replicate AppLovin's "Money-Making Ability"?"

January 3, 2025, Initial Coverage Part I ""Feel-Good Story" AppLovin Revealed: A Five-Year Winning Strategy"

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Risk Disclosure and Statement of This Article:Dolphin Research Disclaimer and General Disclosure