AppLovin's Q3 Surge Confirms Operational Strength but Fails to Address Severe Overvaluation and Risks

What happened

A recent article highlights AppLovin's Q3 2025 performance, with 68% revenue growth driving 82% EBITDA margins and soaring free cash flow, attributed to its MAX-AXON platform efficiency. This aligns with the DeepValue report's recognition of strong fundamentals, including rapid revenue growth, high margins, and robust free cash flow conversion since the company's pivot to a pure-play AI advertising platform. However, the report underscores that the stock's ~128% rally over 12 months has pushed valuation to extreme levels, trading at ~87x trailing EPS and ~106x EV/EBITDA, roughly 8x above a conservative DCF anchor of $82. Critical risks such as an ongoing SEC probe into data practices, dependency on Apple and Google privacy policies, and allegations of ad fraud remain unaddressed, posing material threats to future performance. Thus, while the Q3 results demonstrate operational excellence, they do not mitigate the valuation bubble or reduce the likelihood of a sharp repricing if growth falters or regulatory issues escalate.

Implication

The Q3 performance reinforces AppLovin's operational efficiency but does not alter the investment thesis, which hinges on valuation and risk factors rather than short-term earnings beats. Current multiples embed unsustainable assumptions of sustained high-teens growth and >80% margins, ignoring vulnerabilities from platform dependencies and competitive pressures. Regulatory headwinds, including the SEC investigation and potential privacy policy shifts, could abruptly degrade the company's data-driven moat and profitability, triggering multiple compression. Aggressive share buybacks at elevated prices amplify downside risk if growth normalizes or external shocks occur, reducing financial flexibility. Therefore, despite the positive news, the risk/reward profile remains heavily skewed to the downside, warranting caution and highlighting the need for a significant price correction or risk resolution before considering investment.

Thesis delta

The new article on AppLovin's Q3 surge confirms the operational strengths already noted in the DeepValue report, such as high revenue-to-profit conversion and free cash flow growth. However, it does not address the core valuation concerns or mitigate the regulatory and platform risks that underpin the STRONG SELL recommendation. Thus, the thesis remains unchanged, emphasizing that exceptional fundamentals are already priced in, leaving no margin of safety for investors.