Revenue Surges 53% But Shares Still Plummet! AppLovin (APP.US) Falls Over 25% After Hours Just Because Their AI Model Upgrade Was One Step Behind

Zhitong Finance APP has learned that after-hours on Wednesday, US stocks saw mobile advertising platform giant AppLovin (APP.US) deliver a stellar surge in profits, only to be met with a harsh judgment from investors. The company’s share price plummeted more than 25% in after-hours trading due to its second-quarter revenue slightly missing market expectations and lackluster guidance for the next quarter—even as its net profit for the period soared 55% year-on-year and its adjusted EBITDA margin remained at an exceptional 84%.

The financial report shows that for the second fiscal quarter ending June 30, AppLovin achieved revenue of $1.92 billion, up 53% year-on-year but still below analysts’ consensus estimate of $1.94 billion. Adjusted earnings per share were $3.76, marginally beating the market’s consensus of $3.75. Net profit reached $1.27 billion, a sharp 55% increase from $820 million a year ago; adjusted EBITDA was $1.61 billion, up 58% year-on-year, continuing to demonstrate strong profitability.

However, what made the market wary was that this performance report not only failed to beat Wall Street expectations but even fell short of AppLovin's own internal guidance. In the subsequent earnings call, management attributed the core reason for the miss to one word: timing.

Model Upgrade Pace Falters, Management Elaborates on the “Timing” Issue

Co-founder and CEO Adam Foroughi admitted on the call that the company’s game-focused advertising business is highly dependent on the performance improvement of its AI models. Every meaningful iteration of the model enables advertisers to invest more aggressively while maintaining their target advertising ROI. However, in the past second quarter, such a leap in model performance did not arrive as scheduled.

“The issue this quarter boils down to timing,” Foroughi explained. “The pace of significant model improvement was slower than usual, and the next major upgrade in model performance happened just after the end of the quarter.” He emphasized that the company did not observe any weakening in advertiser demand or unfavorable shifts in the competitive environment during the quarter. The publisher revenue on MAX, AppLovin’s aggregation platform, achieved double-digit quarter-on-quarter growth, and AppLovin's share in the publisher waterfall remained stable.

This statement aimed to send a signal to the market: the growth engine itself has not stalled—it’s just that the pace of technological upgrades happened to miss the financial reporting cutoff.

For the current quarter, AppLovin has provided a performance outlook reflecting contributions from the new model. The company expects third-quarter revenue to be between $2.055 billion and $2.085 billion, an increase of about 46% to 48% year-on-year, with the midpoint of $2.07 billion just below analysts’ consensus of $2.08 billion. Adjusted EBITDA is expected to be between $1.71 billion and $1.74 billion, with an adjusted EBITDA margin of about 83%.

Chief Financial Officer Matt Stumpf pointed out that the third-quarter outlook already includes the increased training and computing infrastructure costs associated with deploying the new model, but does not include potential further model launches that have not yet been realized. He reiterated that the company manages with absolute EBITDA and free cash flow as its core metrics, and will continue to invest as long as computing power input brings incremental revenue.

Stumpf said that in the long run, the adjusted EBITDA margin is expected to remain just above 80%, but may fluctuate in the short term due to infrastructure investments.

Consumer Advertising Sets Record, Second Growth Curve Yet to Take Shape

Beyond gaming, AppLovin is actively expanding into broader consumer advertising sectors such as e-commerce. Foroughi revealed that second-quarter consumer ad spending set a new record, 28% higher even than the typically peak fourth quarter of 2025. Nevertheless, this segment’s scale is not yet sufficient to fully offset the volatility of the gaming business, but management expects its contribution to gradually increase.

During the period, the company opened up a self-service advertising platform called “AppLovin Ads Manager” to the public. Foroughi stated that the initial goal was to target mid-sized advertisers with budgets and a willingness to invest in learning the new platform, rather than immediately competing for the largest brands or a mass of long-tail small merchants. The system is already able to efficiently generate interactive landing cards, though technical challenges remain in automatically producing high-quality long video ads. Once these are solved or alternative solutions are introduced, it will greatly lower the creative barrier for small and medium advertisers.

Looking to the long term, Foroughi believes that the combination of continuous optimization of gaming ad models and expansion into consumer businesses is expected to support annual compound growth of around 30% for the company’s performance.

In terms of cash flow, free cash flow for the second quarter was $863 million. Stumpf explained that the cash conversion rate was below normal mainly due to the timing mismatch between international cash taxes and interest payments, not a change in profitability, and it is expected to improve in the third quarter. For the full year, the free cash flow conversion rate is expected to return to about 75% of adjusted EBITDA.

The company’s balance sheet remains robust, with cash holdings of $3.05 billion at quarter-end, total debt of $3.7 billion, and a net leverage ratio of only about 0.1x, well below its long-term target of around 1x leverage. In terms of buybacks, AppLovin repurchased and canceled about 1.14 million shares for roughly $551 million in the second quarter, a significant slowdown compared to the nearly $1 billion repurchase in the first quarter. Stumpf clarified that this only reflects the temporary drop in free cash flow for the quarter and that the company’s attitude toward buybacks has not changed. As of the end of the quarter, about $1.8 billion of buyback authorization remained available.

Additionally, Stumpf disclosed that the voluntary inquiry by the US Securities and Exchange Commission (SEC) has concluded with no action suggestions proposed, and the company considers the matter insignificant.

Why Isn’t the Market Buying It: High Expectations Meet AI Anxiety

Ahead of the earnings release, AppLovin’s share price had already dropped about 40% this year from highs above $740, with its forward P/E ratio falling from extremely high levels to around 25x, closer to the ad-tech sector’s normal valuation. For this reason, a clean “beat” could have triggered a retaliatory rebound. In the end, however, both revenue and guidance fell short, providing new ammunition for short sellers.

Deeper unease remains tied to AI disruption. Although AppLovin has consistently emphasized that its Axon system leverages AI for precise mobile ad matching and has successfully expanded beyond gaming, some investors remain wary of any traditional software and ad platforms potentially at risk from the AI wave. Market analysts are likewise divided: some optimists maintain target prices well above $700, seeing the recent sell-off as overdone; more cautious voices suggest that as the platform matures, the easiest acceleration phase may be fading.

Ultimately, AppLovin's experience again validates the current market’s harsh logic: in an environment relentlessly chasing “perfection,” a company with annual revenue growth still above 50% can be cast as a disappointment simply for advancing at a pace marginally below the most optimistic expectations. As its financial report paradoxically reveals—by almost any conventional standard, this quarter was strong, but in this climate, “strong” is far from enough.