APP

App-etite for Destruction: The AI Ad Machine That Won't Stop Printing Money

AppLovin (APP) | February 2026 | Price: $412

You've downloaded a mobile game you never planned to play. Congratulations — AppLovin probably got paid for that. Now the question is whether it will get paid again, bigger, and in ways you didn't expect.

AppLovin just reported its Q4 2025 results, and the numbers are genuinely difficult to contextualize without sounding like you're being paid to write them. Revenue of $1.66 billion in a single quarter. A 66% year-over-year gain. A net margin of 66%. An adjusted EBITDA margin of 84%. CFO Matt Stumpf referenced the "Rule of 40", a metric the software industry uses to check if a company is growing and profitable enough. AppLovin scored 150. The rule didn't have a bucket for that.

For the full year 2025: $5.48 billion in revenue, up 70%. Net income of $3.33 billion, up 111%. Free cash flow of $3.95 billion, up 91%. These are not rounding errors. This is a company that has found something that works and is pressing on the accelerator with everything it has.

What AppLovin Actually Does

AppLovin is best described as the plumbing of mobile advertising. At its core sits AXON 2.0, a proprietary AI engine that uses reinforcement learning to predict which users will respond to which ads, without relying on invasive tracking. When Apple upended the mobile ad industry with its App Tracking Transparency changes in 2021, most of the industry went into crisis mode. AXON thrived. It doesn't need cookies or cross-app identifiers — it uses contextual and behavioral signals to do the targeting, and it does it extraordinarily well. The result: a 75% jump in Revenue Per Installation even as competitors bled.

This is the foundation of the moat. The more ads AXON runs, the more it learns. The more it learns, the better it performs. The better it performs, the more advertisers spend. The more advertisers spend, the more data AXON gets. The flywheel is real, and it has been spinning for years.

The E-Commerce Bet Changes the Equation

Mobile gaming is where AppLovin built its empire, but the company is clearly not satisfied dominating a single vertical. Its e-commerce push — using the same AXON engine, now branded as AXON Ads Manager with a self-serve interface — is the single most important strategic story of 2026.

The logic is elegant: if AXON can drive installs for mobile games (historically the hardest category to monetize online), it can absolutely drive purchases for physical products. The infrastructure built for extracting value from casual gamers is now being pointed at the far larger world of consumer spending. Analysts project e-commerce alone could contribute $1.45 billion in revenue by end of 2026, and the company is guiding for full-year revenue approaching $7.9 billion.

AXON 3.0 is the next step: generative AI that doesn't just place ads but creates them in real time, making AppLovin a full-stack creative and distribution platform. Connected TV via its Wurl acquisition adds another frontier. The company hired Maynard Webb — former COO of eBay — to its board specifically to guide the commerce expansion. These aren't accidental pivots. This is a deliberate expansion of a proven engine into new fuel.

The APP Scoring

1. Essential or Nice-to-Have? — 7/10 AppLovin is not electricity. But for the hundreds of thousands of mobile app developers and, increasingly, e-commerce advertisers who depend on AXON to drive user acquisition, it is becoming critical infrastructure. The more verticals it enters, the more essential it becomes.

2. Current Moats? — 8/10 The AXON engine is a genuine technological moat — proprietary, self-improving, and built on years of data accumulation that cannot be easily replicated. The combination of privacy-compliant targeting, 80%+ EBITDA margins, and near-unmatched performance metrics puts AppLovin in rare company. A weaker-than-maximum rating reflects the real risk from Meta, Google, and new AI-native entrants who are paying close attention.

3. Are Moats Expanding? — 8/10 Yes, visibly. Each new vertical — e-commerce, CTV, self-serve — adds data, scale, and advertiser diversification. AXON gets smarter with every campaign it runs. The moat is not only wide; it is getting wider. The risk is execution: expanding into e-commerce at the same performance level as gaming is not guaranteed.

4. Balance Sheet Strength? — 6/10 This is the least flattering part of the story. AppLovin carries $3.5 billion in debt against $2.5 billion in cash, a debt-to-equity ratio of 238%. The good news: interest is covered at 13.8x, and free cash flow of nearly $4 billion per year makes the debt entirely manageable. The company is not distressed. But it is not a fortress either, and anyone who has lived through a credit cycle knows leverage feels fine until it doesn't.

5. EPS Accelerating? — 9/10 Q4 2025 EPS of $3.24 versus $1.73 a year prior is an 87% year-over-year jump — and analysts expect EPS to reach $14.75 in 2026, up from approximately $9.42 in 2025. That's another 56% acceleration in a single year. The rate of EPS growth is genuinely exceptional and shows no signs of plateauing given Q1 2026 guidance of 84% EBITDA margins.

6. Net Margins Increasing? — 9/10 Operating margin went from 44.3% in Q4 2024 to 76.9% in Q4 2025. Net margin for full year 2025 reached 61%. EBITDA margins expanded from 75% to 84%. This is not just growth — this is the operating leverage story of the decade in software. Every incremental dollar of revenue is extraordinarily profitable.

7. ROIC Profile? — 9/10 A trailing return on investment of 253% leaves little to debate. The business generates extraordinary returns on every dollar invested, which is the hallmark of a genuine compounding machine. The caveat — and it must be stated — is that high leverage inflates equity-based return metrics. But even adjusting conservatively, ROIC is well above 15% and expanding.

8. Reinvestment Rate? — 6/10 AppLovin is reinvesting in AXON development, e-commerce infrastructure, and AI creative tooling, but the capital-light nature of software means it doesn't need to reinvest heavily to grow. The bulk of capital is being returned to shareholders rather than plowed back into the business. This is not a criticism — it reflects the quality of the model — but it means the reinvestment rate is moderate rather than aggressive.

9. Capital Returns? — 7/10 The company bought back $2.58 billion in shares in 2025, funded entirely by free cash flow, with a remaining authorization of $3.28 billion. That's a serious commitment. With the stock sitting 44% below its all-time high, buybacks at current prices are genuinely accretive. No dividend yet, which limits the score for income-focused investors.

10. Valuation — Reverse DCF? — 4/10 At roughly $412 per share, AppLovin trades at a forward P/E of approximately 35x and an EV/FCF of ~46x. The PEG ratio of 0.73 suggests the growth is not fully priced in, but a reverse DCF implies the market is pricing in sustained 40–50% annual growth for a decade — a heavy burden to carry. Consensus analyst targets average $757, a 65% premium to current prices. The truth is probably somewhere in between: the company is not absurdly overvalued after the pullback, but it is priced for near-perfection.

Overall Score: 73/100

AppLovin is one of the most extraordinary businesses built in the last decade — a software company with an 84% EBITDA margin, a self-improving AI engine, $4 billion in annual free cash flow, and a credible path into markets many times larger than its current one. The moat is real, the momentum is real, and management is clearly executing.

The two things holding back a higher score are leverage on the balance sheet and a valuation that, even after a significant drawdown from all-time highs, prices in an enormous amount of future success. One misstep in the e-commerce expansion, and the multiple contracts painfully.

For the long-term compounder — patient, high-conviction, willing to sit through volatility — this is the kind of business you study carefully. The algorithm is exceptional. The company is exceptional. The price is the question. We own APP in our public portfolio. Simon Severino owns APP in his personal portfolio.

This article is for informational purposes only and does not constitute financial advice. Always do your own research.

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