In-app advertising platform and AI darling AppLovin (APP) continues its rally after tariff turbulence and short-seller reports earlier this year. Lop off the unsustainable run-up in February in the chart below, and AppLovin has actually been a decent performer so far in 2025. Can it continue? We think it could.
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Digital ads still one of the best (if not the best) use of AI so far
AppLovin has quickly grown into a significant player in the digital ads industry. We mentioned in a number of reports last year the significant ad performance marketers can get due to targeting and user behavior tracking within an app.
Here’s the history of our AppLovin videos, which followed some publicly written research in 2023 – during the company’s proposal to acquire Unity Software (U) in the midst of Unity’s not-so-great purchase of IronSource – and a deep dive on AppLovin in April 2024 for Semiconductor Insiders not long after we launched our service.
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AppLovin powers its ad software using its AXON 2.0 AI platform – which uses predictive machine learning to send the right ad to the right app users. AppLovin segments its products as follows:
- AppDiscovery is the marketing software solution, “the cornerstone” of AppLovin’s software. As is the case in digital advertising, AppDiscovery matches advertiser demand with publisher supply through auctions at vast scale in the cloud.
- MAX is the fast-growing publisher monetization software, which uses in-app bidding that optimizes the value of a publisher’s advertising inventory by running a real-time competitive auction among marketers.
- Adjust is the measurement and analytics software to help marketers measure the effectiveness of their ad campaigns (measures ROI, return on investment).
- Wurl is the connected TV (CTV) software, acquired in 2022, that distributes streaming video for content companies and provides ad solutions to attract viewers.
What’s the TikTok connection?
Along with its Q1 2025 earnings release, AppLovin co-founder and CEO Adam Foroughi published a blog confirming AppLovin is among the other big tech companies pursuing a purchase of TikTok. Here’s the link, and the high level rationale in the slide below: https://www.applovin.com/blog/why-pursue-tiktok/
The real reason for the proposal, though? AppLovin thinks it can make a lot of money powering TikTok’s burgeoning ad business using AXON 2.0! We’re all anxiously awaiting an update on this saga, but don’t think it reasonable to factor a tie-up with TikTok into an AppLovin ownership thesis at this point.
Could AppLovin really support the TikTok social media behemoth?
Last year, we explained how AppLovin built its business. Its software and AI were built within Alphabet’s (GOOGL/GOOG) Google Cloud. AppLovin expanded this relationship a couple years later in 2023 when it got access to a fleet of Nvidia L4 GPUs for running AXON 2.0 AI inference.
Suffice to say AppLovin has ample infrastructure available – via Google Cloud – to support the expansion of its AI should it win the proposal for TikTok. The financials indicate as much. Speaking of the financials…
Q1 2025 highlights: AppLovin more focused on ad software
AppLovin continued its epic rise in Q1 2025. Even with lapping its huge growth in 2024, revenue in Q1 2025 was up 40% – diluted by the sluggish “Apps” segment which will be divested (expected to be completed in June 2025).
To illustrate the ad software business momentum:
As previously promised, Foroughi and company are offloading the Apps (a collection of mobile games and app developer studios) to become a focused “pure-play” on AI-powered digital ads software. The studios will be sold to fellow app developers Tripledot for $400 million in cash plus a 20% equity stake in the new Tripledot (total value ~$900 million). The latter equity stake component is likely to retain the Apps business and Tripledot as a user of AppLovin’s ad software suite.
Selling the Apps business refuels the balance sheet
Part of AppLovin stock’s meteoric rise was a frenetic pace of stock repurchases the last few years. But as AppLovin management explained late in 2024, future buybacks would be funded primarily with free cash flow (FCF). Good news, given cash on balance continued to get used up through Q1 2025.
Here’s the balance sheet high-level overview trend:
One criticism on the use of cash for share repurchases is that the overall share count has flattened out in the last year. In other words, buybacks aren’t having the impact they were a couple years ago during the last bear market of 2022-23. There’s a simple reason: The stock price is up well over 10x in a very short period of time, so a $1 billion buyback doesn’t go nearly as far when the market cap is $130 billion versus when it was 1/10th the size.
Nevertheless, AppLovin does continue to shrink its share count with these repurchases, so we don’t think anyone ought to get too upset.
Margin expansion still part of the growth story?
After such an epic run, let’s turn to the guidance. Advertising software revenue (excluding the soon-to-be-sold Apps business) is naturally going to slow down. On a year-over-year basis, AppLovin is expecting 70% growth – but just 4% quarter-over-quarter growth. This could be just a quarterly one-off, or the start of a more pronounced slowdown for AppLovin’s new ad empire. Worth monitoring.
Whatever the case, it does appear the AI algorithms still have a lot to offer for the profit margin expansion case. Adjusted EBITDA is expected to be up 6% in Q2 compared to Q1, faster than revenue growth, implying margins are still rising.
The stock now values AppLovin at approximately 40x both one-year-forward expected GAAP earnings per share and free cash flow. This is no longer a cheap stock like it was when we first bought early in 2024. But with AppLovin eyeing expansion of its AXON 2.0 AI platform into new realms of the digital ad economy beyond in-app marketing, we’re happy holding our position here to see how all this plays out.
See you over on Semiconductor Insider for more updates on APP stock later this year! https://chipstockinvestor.com/membership/
