AppLovin's Record Earnings Met With 30% Stock Drop, Highlighting Embedded Fragility in Growth Narrative

What happened

AppLovin reported its best-ever quarterly results for Q4 2025, with record revenue, an 84% adjusted EBITDA margin, and earnings per share of $3.24. Despite these strong metrics, the stock declined nearly 30%, signaling that the market is focused on forward-looking risks rather than past performance. The DeepValue report indicates that the current price embeds expectations for sustained high profitability and rapid non-gaming expansion, leaving no margin of safety. Key vulnerabilities include substantially all customer contracts being cancelable on short notice and dependence on platform policies from Apple and Google, which can quickly impair targeting economics. Thus, the sell-off reflects investor skepticism about the durability of these earnings and the upcoming proof points required in Q1-Q2 2026.

Implication

The sharp drop after stellar earnings reveals that even exceptional results cannot offset market fears about growth sustainability and policy risks, reinforcing the DeepValue 'WAIT' rating. Investors must scrutinize Q1 2026 results against the demanding guidance of $1.745B-$1.775B revenue and $1.465B-$1.495B adjusted EBITDA at an 84% margin to validate Axon-driven economics. Additionally, the successful general availability of Axon Ads Manager for e-commerce in the first half of 2026 is critical for non-gaming scaling, and any delay would weaken the expansion thesis. Given the cancellable nature of customer contracts, any miss on these milestones could trigger rapid advertiser churn and further downside, as highlighted in the report. Therefore, patience is warranted until these confirmations materialize, with entry better suited around the $330 attractive level noted in the analysis.

Thesis delta

The investment thesis remains unchanged: AppLovin's valuation hinges on confirming sustained high margins and successful non-gaming expansion in the coming quarters. However, the market's negative reaction to strong earnings suggests increased sensitivity to any signs of weakness, potentially accelerating downside risks if guidance is missed or policy headwinds emerge.