AppLovin (APP)

Mobile app advertising platform AppLovin (NASDAQ: APP) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 40.3% year on year to $1.48 billion. On the other hand, next quarter’s revenue guidance of $1.21 billion was less impressive, coming in 14.3% below analysts’ estimates. Its GAAP profit of $1.67 per share was 16.2% above analysts’ consensus estimates.

Company Overview

Co-founded by Adam Foroughi, who was frustrated with not being able to find a good solution to market his own dating app, AppLovin (NASDAQ:APP) is both a mobile game studio and provider of marketing and monetization tools for mobile app developers.

The digital advertising market is large, growing, and becoming more diverse, both in terms of audiences and media. As a result, there is a growing need for software that enables advertisers to use data to automate and optimize ad placements.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Thankfully, AppLovin’s 22.2% annualized revenue growth over the last three years was decent. Its growth was slightly above the average software company and shows its offerings resonate with customers.

This quarter, AppLovin reported magnificent year-on-year revenue growth of 40.3%, and its $1.48 billion of revenue beat Wall Street’s estimates by 7.3%. Company management is currently guiding for a 11.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 15.1% over the next 12 months, a deceleration versus the last three years. Still, this projection is admirable and suggests the market is baking in success for its products and services.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

AppLovin is extremely efficient at acquiring new customers, and its CAC payback period checked in at 15 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give AppLovin more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

AppLovin’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 77.7% gross margin over the last year. Said differently, roughly $77.72 was left to spend on selling, marketing, and R&D for every $100 in revenue.

AppLovin’s gross profit margin came in at 81.7% this quarter, marking a 9.5 percentage point increase from 72.2% in the same quarter last year. AppLovin’s full-year margin has also been trending up over the past 12 months, increasing by 7.8 percentage points. If this move continues, it could suggest a less competitive environment where the company has better pricing power and leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

AppLovin has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 42.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, AppLovin’s operating margin rose by 17.2 percentage points over the last year, as its sales growth gave it immense operating leverage.

In Q1, AppLovin generated an operating profit margin of 44.7%, up 12.6 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

AppLovin has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 49.2% over the last year.

AppLovin’s free cash flow clocked in at $825.7 million in Q1, equivalent to a 55.6% margin. This result was good as its margin was 18.5 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.

Over the next year, analysts predict AppLovin’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 49.2% for the last 12 months will increase to 58.4%, giving it more flexibility for investments, share buybacks, and dividends.

AppLovin reported $551 million of cash and $3.71 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $3.11 billion of EBITDA over the last 12 months, we view AppLovin’s 1.0× net-debt-to-EBITDA ratio as safe. We also see its $182.2 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We like that the company handily beat revenue and EBITDA expectations this quarter. We were also impressed by AppLovin’s optimistic EBITDA guidance for next quarter, which blew past analysts’ expectations. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 14.2% to $346.74 immediately following the results.

Updated: June 14, 2025 at 10:21 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in AppLovin.

AppLovin is a fine business. First off, its revenue growth was solid over the last three years. On top of that, AppLovin’s bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive operating margins show it has a highly efficient business model.

AppLovin’s price-to-sales ratio based on the next 12 months is 22.2x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in. Add this one to your watchlist and come back to it later.

Wall Street analysts have a consensus one-year price target of $461.65 on the company (compared to the current share price of $363.50).