Delayed AI Model Improvements Weighed on 2Q Performance; Long-Term Growth View Unchanged but Target Price Lowered

Overview

This report reviews AppLovin’s 2Q26 results and management outlook. The company’s quarterly revenue and adjusted EBITDA missed prior expectations, primarily because the timing and impact of AXON model upgrades were below internal forecasts, rather than due to a structural deterioration in demand as viewed by management. The consumer advertising business continued to expand, but cloud computing, model inference, and customer acquisition investments are putting near-term margins under pressure. Goldman Sachs remains positive on the long-term mobile gaming advertising market and the company’s high-margin business mix, but maintains a Neutral rating until the growth drivers and conversion path of new investments become clearer.

Core views

In the short term, underwhelming model improvements and rising cost investments have weakened earnings visibility. In the medium term, recent model upgrades, consumer advertising expansion, and the addition of more mid-market advertisers could create upside risk to forecasts. In the long term, the company is still expected to deliver growth above the advertising and marketing industry average while maintaining strong margins. Goldman Sachs needs deeper intra-quarter industry channel checks to confirm whether improvements since the third quarter can translate into sustained outperformance.

Analysis framework

The report starts from the variance between actual results and Goldman Sachs’ and market expectations, breaking down three key drivers: the core AI model, consumer advertising, and cost investments. It then revises forecasts for third-quarter and full-year revenue, adjusted EBITDA, and EPS, and derives the target price using an equal-weighted EV/GAAP EBITDA and modified DCF methodology, while calibrating valuation assumptions against historical valuation ranges and growth multiples.

Methodology notes

• Relative ValuationEV/GAAP EBITDA Valuation Method

  Apply a 17.0x EV/GAAP EBITDA multiple to the next twelve months plus one year forecast.

  The valuation multiple was lowered from 22.0x to 17.0x to reflect downward earnings forecast revisions and to align more closely with AppLovin’s roughly 17x four-year historical average; the corresponding valuation-to-growth ratio remains unchanged at about 0.65x.

• Cash Flow ValuationModified DCF and EV/FCF-SBC Valuation Method

  Apply a valuation multiple to free cash flow after stock-based compensation over the next twelve months plus four years, discounted over three years.

  The methodology uses a 17.0x EV/FCF-SBC multiple and a 12% discount rate, with the absolute multiple lowered from 20.0x; the valuation-to-growth ratio was reduced from 0.89x to 0.80x to match the company’s roughly 0.8x four-year historical average.

• Blended Target PriceEqual-Weighted Blended Valuation

  The relative valuation result and modified DCF result each carry a 50% weight.

  Goldman Sachs equally weights the EV/GAAP EBITDA valuation and modified DCF valuation to arrive at a 12-month target price of $465.

• Factor AnalysisGS Factor Profile

  Compare the stock with the market and industry peers based on growth, financial returns, valuation multiples, and composite metrics.

  Growth metrics reference forward revenue, EBITDA, and EPS growth; financial returns reference ROE, ROCE, and CROCI; valuation metrics reference standardized rankings for P/E, P/B, and enterprise value multiples.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• APP.US

  U.S.-listed company stock directly covered by this report

  Strengths

  The mobile gaming advertising market offers long-term structural growth opportunities; momentum in the consumer advertising business is strengthening; adjusted EBITDA margin remains high at roughly 80% to 85%; the company continues to repurchase shares.

  Weaknesses

  The timing and magnitude of core AI model improvements are not sufficiently stable; visibility into medium-term revenue growth and margins has declined; stock-based compensation expenses have increased significantly both year-over-year and sequentially.

  Comparison

  The target price valuation multiple has been lowered to a level closer to the company’s four-year historical average, reflecting Goldman Sachs’ cautious stance on near-term growth visibility and downward forecast revisions.

  Risks

  Data privacy and regulation, third-party app distribution policies, changes in the competitive environment, macroeconomic volatility, and cloud hosting and market expansion investments exceeding expectations.

Key data

• 12-month target price$465Previously $585; rating maintained at Neutral.
• Target price upside11.3%Corresponds to a reference share price of about $417.80.
• Consumer advertising growthUp 28% versus 4Q25Expansion among mid-market advertisers continues to make progress.
• Adjusted EBITDA marginApproximately 80% to 85%Still at a high level, but declined sequentially in the second quarter, with third-quarter guidance implying a further pullback.
• 3Q26 revenue forecast$2.07bnPrior forecast was $2.04bn.
• 3Q26 adjusted EBITDA forecast$1.72bnUnchanged from the prior forecast.
• 3Q26 GAAP EPS forecast$4.01Prior forecast was $4.06.
• 2026 revenue forecast$8.03bnPrior forecast was $8.05bn.
• 2026 adjusted EBITDA forecast$6.66bnPrior forecast was $6.80bn.
• 2026 GAAP EPS forecast$15.49Prior forecast was $15.94.
• Second-quarter share repurchasesApproximately $551mnCumulative repurchases year-to-date in 2026 were approximately $1.52bn.
• Long-term revenue growth outlookCompound growth above 30%Management reiterated its confidence in sustained growth.

Impact & implications

The earnings miss and target price cut may limit near-term valuation expansion, particularly as the market needs to reassess the speed at which AI model upgrades translate into revenue growth and the impact of incremental cloud computing and market expansion investments on margins. If model improvements since the third quarter can be sustained and consumer advertising accelerates during the peak season, current forecasts may prove conservative. Conversely, if model impact continues to be delayed or cost growth outpaces revenue, the investment thesis of high growth and high margins will face further pressure.

Risks

• Changes in data privacy rules and regulations could reduce the effectiveness of advertising technology platforms and constrain revenue growth.
• Changes in technical requirements or policies of third-party app distribution channels could affect the company’s growth prospects.
• Changes in the competitive environment could weaken management’s execution capability, advertiser acquisition efficiency, or platform pricing power.
• A weakening global macroeconomy could pressure advertising budgets and customer demand.
• If the timing or impact of core AI model upgrades continues to fall short of expectations, revenue growth may face further pressure.
• Cloud hosting, model inference, and market expansion investments could cause margins to decline more than expected.
• Continued growth in stock-based compensation expenses could weaken GAAP profitability and the quality of shareholder returns.

What to watch

• Whether AXON model improvements since the third quarter can continue to improve ad delivery effectiveness and revenue growth.
• Whether the consumer advertising business can continue expanding during the seasonally strong holiday peak season and attract more mid-market advertisers.
• Whether third-quarter revenue can reach approximately $2.07bn and the execution path toward management’s long-term revenue compound growth target above 30%.
• The actual impact of cloud hosting, inference, and market expansion investments on adjusted EBITDA margin.
• Whether intra-quarter industry channel checks validate the company’s return to sustained outperformance.
• The pace of share repurchases, stock-based compensation expenses, and their combined impact on per-share value.