AppLovin Shows Strong Ad Growth Despite Rising Compute Costs, Maintains £610 Target Price August 14, 2026

AppLovin Shows Strong Ad Growth Despite Rising Compute Costs, Maintains £610 Target Price

Company Overview

AppLovin Corp operates as a leading mobile advertising technology platform, specialising in gaming applications whilst expanding into consumer verticals. The company’s core business centres around its advertising segment, leveraging advanced machine learning models to optimise ad performance and publisher earnings through its MAX platform.


Strong Second Quarter Performance

AppLovin delivered robust second quarter 2026 results, with revenue climbing 53% year-on-year to US$1.92 billion and profit after tax and minority interests rising 55% to US$1.27 billion. The performance was driven by improved model performance in gaming and successful expansion into consumer verticals. Both first half revenue and PATMI reached 49% of full-year forecasts, indicating solid progress towards annual targets.


Advertising Business Momentum Continues

The company’s advertising segment demonstrated continued strength, with gaming maintaining its position as the primary revenue contributor. Notably, non-gaming consumer verticals achieved record performance, with advertiser spend increasing approximately 28% compared to the seasonal peak in fourth quarter 2025. MAX publisher earnings also recorded strong double-digit sequential growth during the period.

Looking forward, AppLovin is strategically expanding its focus on the mid-market segment through partnerships and customer acquisition initiatives. This approach aims to attract more advertisers and capture higher spending across retail and e-commerce sectors. Management expects mid-market customers to provide enhanced visibility into users’ transactional behaviour, supporting growth beyond traditional gaming markets.


Operational Challenges and Cost Pressures

Despite strong revenue growth, operational expenses increased approximately 39% year-on-year, primarily driven by a 127% spike in research and development expenses related to higher model training and inference costs. This resulted in free cash flow growth slowing to 12% year-on-year at US$863 million, compared to 70% growth in the previous year.

Consequently, AppLovin reduced share buyback activity, repurchasing 1.14 million shares for US$551 million. However, management anticipates free cash flow improvement in third quarter 2026 and expects normalisation at approximately 75% of adjusted EBITDA for the full year.


Research Recommendation

Phillip Securities Research maintains a BUY rating but has reduced the target price to US$610 from US$635, reflecting higher compute and inference costs whilst keeping revenue forecasts unchanged.


Frequently Asked Questions

Q: What were AppLovin's key financial results for second quarter 2026?

A: AppLovin reported revenue of US$1.92 billion, up 53% year-on-year, and profit after tax and minority interests of US$1.27 billion, representing a 55% increase. Both metrics were in line with expectations.

Q: Which business segments drove AppLovin's growth?

A: Gaming remained the main revenue contributor, whilst non-gaming consumer verticals reached record levels with advertiser spend rising approximately 28% compared to the seasonal peak in fourth quarter 2025.

Q: What is Phillip Securities Research's recommendation and target price?

A: The firm maintains a BUY rating with a target price of US$610, reduced from US$635 to reflect higher compute and inference costs.

Q: Why did operating expenses increase significantly?

A: Operating expenses rose approximately 39% year-on-year, mainly due to a 127% spike in R&D expenses from higher model training and inference costs associated with improving the company's machine learning models.

Q: How did rising costs affect AppLovin's cash generation?

A: Free cash flow growth slowed to 12% year-on-year at US$863 million due to higher expenses, leading the company to reduce share buyback activity during the quarter.

Q: What is AppLovin's strategy for future growth?

A: The company is expanding focus on the mid-market segment through partnerships and customer acquisition initiatives to attract more advertisers across retail and e-commerce, expecting this to provide better visibility into user behaviour.

Q: What are management's expectations for free cash flow?

A: Management anticipates free cash flow improvement in third quarter 2026 and expects normalisation at approximately 75% of adjusted EBITDA for the full year 2026.

AppLovin Shows Strong Ad Growth Despite Rising Compute Costs, Maintains £610 Target Price

This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.

 

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About the author

AppLovin Shows Strong Ad Growth Despite Rising Compute Costs, Maintains £610 Target Price

Serena Lim Yi Qi

Serena is a Research Analyst covering the U.S. Technology sector at PSR. Prior to joining the firm, she worked as an Equity Dealer and held various roles across the insurance and banking industries. Serena holds a Bachelor's degree in Economics and a Postgraduate Diploma in Applied Finance from the University of Adelaide.

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