$APP
There's been a lot of disbelief around how $APP could possibly be trading at 14.9x NTM PE despite growing top-line in the mid-50s %, with 88% GPM, 78% OPM.
However, I think after diving deeper into the business, this shouldn't come as much of a surprise.
AppLovin's current profitability is exceptional, but the duration of that profitability is much less certain. High margins tell you how profitable a business is today, but a premium multiple requires confidence in what it can earn many years from now.
There are a few reasons I think the market has not ascribed a premium valuation to $APP, that is not just because they missed their own guidance:
1. AppLovin's moat depends on performance advantages that must continually be renewed.
From expert calls, and earnings numbers (in the case of Unity), the recurring theme has been that competitors such as Moloco, Unity and Liftoff have improved their models, narrowing parts of the differentiation.
Management also alluded to this. On its Q2 2026 call, management attributed the guidance shortfall to weaker-than-normal model improvements, and it is widely known that the move from AXON 1.0 to 2.0 was directly responsible for the acceleration in growth.
In the advertising space, advertisers allocate budgets according to returns at scale. AppLovin's strength is delivering attractive returns across a much larger budget, but not necessarily the highest ROAS for every advertiser.
There is evidence that competitors are improving. Unity’s Q2 2026 strategic Grow revenue increased 63%, while total Grow revenue increased 35%, with Unity attributing growth in its advertising network to Vector. This does not establish that Unity is taking AppLovin’s share, but it makes technological catch-up a credible risk.
Investors can therefore recognise AppLovin's current lead while assigning less certainty to its persistence.
2. Mobile gaming advertising is a relatively stagnant market and it shows in AppLovin's numbers.
In Q2, net revenue per installation increased 58%, while installation volume fell 2%. Installation volume is not the same as advertising inventory or engagement, but the figures show how heavily growth depended on improved monetisation.
AppLovin is monetising better, and that is their greatest strength, however maintaining growth through successive improvements in monetisation is a much more demanding assumption than growing alongside a rapidly expanding underlying market.
3. AppLovin's earnings power being based on model performance means growth may be sporadic rather than linear.
As we discussed earlier, a significant driver of AppLovin’s growth is its ability to improve Axon’s predictions. Better targeting allows advertisers to achieve their return objectives at higher spending levels, expanding the budgets AppLovin can capture.
However, technological progress does not follow a predictable quarterly schedule, as proven in Q2 earnings.
This matters for valuation because investors are generally willing to pay higher multiples for predictable growth. In AppLovin’s case, sustaining that growth may require repeated technical advances whose timing and impact are difficult to forecast.
Personally, I like AppLovin as a business, and management has demonstrated excellent execution. However, these uncertainties mean I would prefer a larger margin of safety in the price I pay.
