AppLovin's AI Pivot Amid High Valuation and Risks

What happened

AppLovin has announced a strategic shift to focus exclusively on AI-driven advertising by divesting its gaming-related Apps segment, as reported in recent news. This move aligns with the company's previously disclosed plan to sell its mobile gaming business for $900 million, detailed in the DeepValue report. The report notes strong Q2 2025 performance with revenue of $1.26 billion and net income of $820 million, supported by rising AppDiscovery metrics. However, a trailing P/E of 104x reflects lofty expectations, compounded by ongoing litigation and platform-policy risks like ATT and EU scrutiny. Ultimately, while the divestiture sharpens focus on core ad tech, the high valuation leaves minimal room for error in execution.

Implication

The divestiture frees up capital and focuses AppLovin on AI-driven ad tech, potentially enhancing its competitive edge in the growing mobile ad market. However, with a P/E of 104x, the stock prices in near-perfect execution, making it vulnerable to any missteps in integrating the AI focus or adverse regulatory changes. Legal overhangs and dependence on Apple's ecosystem add significant downside risk that could erode advertiser trust and compress valuation multiples. Successful deployment of proceeds towards buybacks or AI investments could support the stock, but investors must weigh this against the high bar set by current valuations. Overall, while the strategic move is logical, the risk-reward profile remains balanced, justifying a continued HOLD stance.

Thesis delta

The news reinforces AppLovin's commitment to an AI-focused strategy but does not materially alter the investment thesis from the DeepValue report. Core risks—such as the high valuation premium, litigation overhang, and platform dependence—remain unchanged, and the divestiture was already priced into the HOLD recommendation. Therefore, no fundamental shift is warranted; investors should continue monitoring key watch items like AppDiscovery KPIs and regulatory developments.