APP: Haunted by 'ghost stories'—even strong results can't hold? ---

$AppLovin(APP.US) released its Q4 2025 results after market close on Feb. 11 ET. The print was decent: while some sell-side estimates were more upbeat, it broadly tracked the more cautious buy-side setup. That said, the stock still delivered a negative reaction to the print.

Specifically:

1. Guidance trending well: For AppLovin, currently in a pivotal expansion phase, guidance remains the key metric to watch. Investors should focus on the trajectory more than the absolute beat.

Q1 guide was slightly above consensus (though a few firms were higher), especially considering management’s conservative guide style. On a sequential basis, Q1 is guided to rise ~10% vs. Q4, slower than Q4’s +18% QoQ as e-commerce seasonality is factored in. Seasonal normalization largely explains the QoQ decel.

After early-year high-frequency data showed softer e-commerce ad momentum, buy-side expectations have been reset lower. So versus the setup, AppLovin’s delivery likely wasn’t the main drag on the stock.

2. Games likely to outperform again: Last year’s narrative focused on e-commerce expansion, but games remain the primary incremental driver in absolute terms. That mix should continue near term.

Based on Q1 guidance and channel checks, we expect game ad revenue to again run above the 20% long-term organic pace. This underscores share gains in AppLovin’s core gaming stronghold, which should partially ease concerns about Meta’s return to iOS in-app ads. Competitive risks remain but appear manageable near term.

3. Profitability still inching up: After exiting 1P gaming apps, OP margin is already high, while e-commerce expansion requires adding client-facing sales headcount to a historically lean team. Even so, Q4 Adj. EBITDA margin improved another 200bps QoQ to a record 84%, driven by revenue leverage and lower absolute opex.

Among opex lines, only G&A rose slightly YoY, but that includes transaction costs tied to the 1P game divestiture. Excluding that, it declined YoY. Discipline on costs remains evident.

4. Continued buybacks: Q4 buybacks slowed, with $480mn spent to repurchase 0.8mn shares at an avg. price of $600/sh. Full-year 2025 repurchases totaled $2.6bn; relative to its $154.4bn market cap, shareholder returns remain modest.

5. Key financial metrics at a glance

Dolphin Research View

Another solid, in-line print overall, yet the stock again sold off, suggesting waning confidence and interest in legacy software. The market reaction looks more sentiment-driven than fundamental.

Unlike Unity, where clear blemishes exist, AppLovin’s results leave little to nitpick. It fell with Unity yesterday and has seen its multiple pressured by recent bear narratives, while buy-side expectations had already cooled as third-party tracking showed slower net domain adds for AXON Pixel since the start of the year. Even so, the delivery still failed to win over capital.

If there is a shortcoming, it’s the slower QoQ growth in both Q4 and Q1 (albeit still double-digit). With valuation already not rich, nitpicking the print seems unnecessary. The only plausible read is concern over whether growth and margins can hold against competition from Meta and Cloudx.

This echoes our main question in the Google Genie note on AppLovin: while we remain confident in AXON in the near term, supported by first-party, full-funnel user data, medium-to-long term debates persist. If rivals close the model gap, what sustains AXON’s potential quasi-monopoly, and if Meta subsidizes bids to secure premium gaming inventory, could that pressure AppLovin’s high profitability?

Still, pricing in long-term hypotheticals today is hardly rational. Competitive threats may cap the rebound, but we see today’s scrutiny as largely sentiment-driven amid multiple simultaneous headwinds (hot nonfarm payrolls denting rate-cut hopes, conservative peer guides, etc.). Such capitulation often creates a near-term bottom once sentiment normalizes.

AppLovin’s market cap is now RMB 155bn-equivalent vs. ~RMB 200bn in Q3, a ~25% drop. Assuming normal gaming ad growth (20%+) and annualized non-gaming ad contribution, we estimate revenue growth of 30%+ and profit growth of 40%+ next year. At the latest close and a market cap of RMB 155bn, EV/EBITDA for this year is ~24x, below its near- to mid-term growth and implying limited premium.

Detailed analysis below

I. Guidance modestly above expectations

Q4 revenue was $1.66bn, +21% YoY, with sequential growth accelerating. Ex-1P game divestiture, ad revenue grew 66% YoY, roughly flat vs. 68% last quarter. Given the auto-bidding tool launched in Oct., the market likely embedded upside here.

Q1 revenue guide is $1.75–1.78bn, implying ~53% growth ex-divestiture. Seasonality naturally slows Q1 growth. The cadence looks reasonable vs. mix and comps.

Assuming game ads grow at the guided ~20% organic pace, Q1 e-commerce revenue would need to reach ~$380mn, which is a stretch in a seasonal trough. We therefore think strong gaming ads are offsetting seasonal headwinds, in line with channel checks showing developers allocating more budget to AppLovin on superior ROAS.

II. Internal efficiencies beat expectations

Q4 company-wide Adj. EBITDA margin reached 84%, up another 200bps QoQ, near a record high. Versus last quarter, the key optimization came from strict control of absolute operating expenses. Discipline continues to underpin margin expansion.

S&M expense still declined YoY, while R&D and G&A ticked up modestly. In practice, AppLovin’s sales team is stretched as it ramps e-commerce clients. Headcount additions will likely follow demand.

At an 84% margin, profitability is already near peak levels. As Meta re-enters iOS in-app ads, AppLovin may need to concede some pricing to defend share. That could cap further margin upside.