Key Points
Investors weren’t loving AppLovin‘s (NASDAQ: APP) Q2 results, and a difficult year for the stock just got worse. The stock crashed last week after it missed revenue expectations, and its shares have been cut in half this year, as of this writing.
Let’s dig into the adtech company’s results and prospects to see if this dip is a good buying opportunity.
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Strong growth but missed expectations
Since the launch of its artificial intelligence (AI) adtech platform, Axon 2.0, in 2023, AppLovin has seen tremendous growth. While its Q2 results came up short of analyst expectations, its growth was still strong. The company’s revenue climbed 53% to $1.92 billion, which was just shy of the $1.94 billion analyst consensus.
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The company said the miss was due to its model not improving at its typical pace, and that the next big boost in model performance did not occur until after the quarter ended. Axon 2.0 helps gaming-industry advertisers attract more customers, and as its AI model improves and advertisers see better returns on their spending, ad spending on its platform tends to increase. It said it saw no signs of increased competition or weakening demand and that growth is already reaccelerating.
AppLovin believes its gaming ad business can compound at 30% annually over the long term. As such, it is investing in computing power and architectural changes that will help it build more complex models.
While revenue came up just short of expectations, adjusted EPS came in slightly above expectations. Earnings per share (EPS) from continuing operations climbed 57% from $2.39 a year ago to $3.76, beating the consensus by $0.01. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, jumped 58% year over year to $1.6 billion.
The company also continues to boost its gross margin while keeping its costs in check. In Q2, its gross margin improved to 88.3% from 87.7% a year ago, while it lowered its general and administrative expenses by 27%.
AppLovin also continues to produce a boatload of cash. In the quarter, it generated free cash flow of $863.3 million and $2.15 billion for the first half of the year. It ended the year with $500 million in net debt, down from $1 billion at the start of the year. The company also repurchased 1.1 million shares in the quarter, worth $551.32 million.
Looking ahead, AppLovin projected Q3 revenue between $2.055 billion and $2.085 billion, representing growth of 46% to 48%. The $2.07 billion midpoint, though, was slightly below the $2.08 billion consensus. It guided for adjusted EBITDA to be between $1.71 billion and $1.74 billion.
Is the stock a buy on the dip?
AppLovin hasn’t yet seen a big boost from opening its platform to smaller advertisers or expanding beyond the gaming industry. However, these newer opportunities still have potential.
For example, the consumer vertical saw a 28% increase in ad spend compared to Q4 2025 levels (which should be seasonally stronger given the holiday season), indicating progress. It is also pursuing third-party partnerships to attract more high-quality advertisers while looking to develop new creative tools and ad formats, which is the biggest hurdle it faces in moving non-gaming advertisers to its platform.
Despite the slight Q2 misstep, AppLovin’s core gaming ad business remains strong. The company has been running a very lean operation, but it looks like it is willing to start spending some of its profits to drive higher growth. It has started to invest more in research and development and compute power but will only continue to do so if it translates into a material revenue lift.
Following the sell-off, the stock, which had gotten pricey, now once again looks cheap, trading at a forward price-to-earnings (P/E) ratio of below 16 times 2027 analyst estimates. Given its growth and opportunities, the stock looks like a buy for more aggressive investors.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
