This week’s Research Note is about:
Applovin — APP 0.00%↑
1. Why We Are Watching It
We are watching AppLovin because:
The business is growing at a rate that is difficult to ignore.
Its economics are strong: high margins, low capital intensity, and substantial free cash flow.
The market debate around AI may be framing the company incorrectly.
The simple thesis:
AppLovin is not a software feature waiting to be replaced by AI. AI is already part of the product. The real question is whether its performance advantage can remain durable inside an advertising ecosystem controlled by much larger platforms.
The key question:
Can Axon — the AI-powered advertising engine that powers AppLovin Ads — keep producing meaningfully better advertising outcomes as competitors improve their own AI, data, and distribution?
2. What It Does
AppLovin is an advertising technology platform that uses AI to help advertisers acquire customers and publishers monetize their inventory.
The core engine is Axon, AppLovin’s AI-powered advertising system.
Its moat depends on performance: better data, better models, better matching, and better returns for advertisers.
If the model produces better returns, customers have a reason to keep spending. If it stops producing better returns, the moat becomes much less interesting.
3. What We Like
The attractive parts:
Exceptional operating economics: Q2 2026 revenue reached $1.924 billion, up 53% year over year. Adjusted EBITDA reached $1.614 billion, up 58%.
Very high margins: 84% Q2 Adjusted EBITDA margin. That is incredible profitability for a business still growing this quickly.
AI appears to be an accelerator today: Q2 did not show the pattern we would expect from a product losing relevance: collapsing growth, pricing pressure, and margin compression. Instead, revenue and EBITDA continued to grow rapidly.
The balance sheet is no longer the main risk: the latest update showed roughly $3.05 billion of cash against $3.52 billion of long-term debt.
Per-share economics are getting support from buybacks: AppLovin repurchased 3.3 million shares for roughly $1.5 billion during the first half of 2026.
4. What Scares Us
The risks:
Platform dependence: Apple and Google control important parts of the mobile ecosystem. Changes to privacy rules, identifiers, app distribution, or data access could reduce the quality of the signals AppLovin uses.
The moat is performance-driven, not structural: advertisers can use several platforms at once. Switching costs exist, but they are not comparable to an ERP, payments network, or mission-critical database that is deeply embedded inside a customer’s organization.
AI could commoditize part of the advantage: the risk is that Meta, Google, Amazon, or another advertising platform builds models that close the performance gap while controlling larger data sets or distribution networks.
Expansion outside gaming still needs proof: e-commerce creates a large potential runway, but success in mobile gaming does not automatically guarantee the same competitive advantage in other advertising verticals.
Regulatory and data-practice risk remain: a business dependent on data access and advertising infrastructure deserves a higher risk discount than the reported margins alone might suggest.
5. Quality Score
Business Quality — 4/5
Strong market relevance
Powerful data and model feedback loop
Significant growth opportunities
Very strong current competitive performance
Financial Quality — 5/5
Very high margins
Strong free cash flow
Very low capital intensity
High returns on capital
Limited current balance-sheet stress
Significant buybacks
Management Quality — 3/5
Execution has been excellent
Capital allocation has supported per-share value
Buybacks still need price discipline
Total Score
12/15
6. Fair Value Range
Our rough fair value range:
