What drove the third-quarter beat?

  • AppLovin’s third-quarter revenue grew 14% sequentially, well above management’s earlier guidance of 7%–8%; revenue and EBITDA were 5% and 6% above Morgan Stanley’s estimates, respectively.
  • The outperformance was mainly driven by the games business: recent model improvements contributed to year-over-year game advertising revenue growth of about 50%; e-commerce advertising revenue grew more than 100% year over year.
  • Management’s fourth-quarter revenue guidance calls for sequential growth of about 8%, below the actual growth rate in the third quarter, while reaffirming confidence in long-term growth opportunities of about 30%.

Why do game model upgrades matter to the long-term outlook?

  • Management compared the technological significance of the new model architecture with AXON 2.0; deployment remains incomplete. The effects are particularly pronounced for new advertisers and categories with less data.
  • Morgan Stanley believes model improvements can help increase ad-targeting efficiency and conversion rates, and support AppLovin’s continued efforts to gain share. The firm estimates the current conversion rate at about 1.3%, leaving room for improvement.
  • According to the firm’s estimates, if conversion rates continue to improve by about 20 basis points annually, net revenue in 2030 could be about 15% above market consensus. This outcome depends on whether conversion-rate improvements can continue.

How could e-commerce expansion change the advertising business?

  • Morgan Stanley views e-commerce as an opportunity to expand the addressable market: new advertisers can improve monetization of ad inventory that previously had relatively low value.
  • The firm expects non-gaming businesses to contribute most of the advertising revenue growth in the coming years, while games remain the profit pillar: it estimates 2 billion dollars in non-gaming advertising EBITDA and 9 billion dollars in game advertising EBITDA in 2028.
  • This expansion faces competitive and data constraints: intensifying competition among ad networks could put downward pressure on platform take rates, while limited access to key data or tighter advertising restrictions by mobile platforms could also affect business performance.

How is Morgan Stanley revising its earnings forecasts and valuation?

  • Driven by third-quarter results, fourth-quarter guidance, and expectations of continued model improvements, Morgan Stanley raised its EBITDA forecasts for 2026 and 2027 by 3% and 4%, respectively, to about 7.02 billion dollars and 8.76 billion dollars.
  • The firm maintained its Overweight rating and raised its price target from 400 dollars to 450 dollars, using a valuation of 14 times EV/EBITDA. Its base-case scenario assumes steady expansion in non-gaming advertising, with total revenue growing at a CAGR of about 29% through 2028.
  • In the bear-case scenario, assuming a weakening competitive advantage, significant macroeconomic pressure, and failure of the non-gaming business to achieve scale, the firm estimates revenue will grow at a CAGR of about 15% through 2028, implying a price target of 175 dollars.