Key Points
AppLovin reported another quarter of soaring revenue.
The advertising technology company's guidance implies decelerating growth in Q1.
AppLovin continues to throw off a huge stream of free cash flow.
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Shares of advertising technology company AppLovin (NASDAQ: APP) are getting absolutely crushed in 2026. But it's not necessarily surprising. When I examined the growth stock last December, I acknowledged that even though the business was seeing impressive business momentum, "staying on the sidelines and hoping for a better price is probably wise." The stock's rise had simply gone too far, pushing the tech company's valuation to euphoric levels.
But the stock has fallen 48% since that article. Has the stock, therefore, finally become cheap enough to justify buying it?
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AppLovin's strong growth continues
This week, AppLovin closed the books on 2025, reporting strong fourth-quarter results. Revenue for the period rose 66% year over year to nearly $1.7 billion. This put the company's full-year 2025 revenue at approximately $5.5 billion, up 70% year over year.
Even more, the company's net income is growing at an even faster rate. AppLovin's fourth-quarter net income rose 84% year over year to $1.1 billion, and full-year 2025 net income increased 111% to $3.3 billion.
This strong financial performance translated to exceptional cash flow. AppLovin's free cash flow in 2025 was $3.95 billion, up from $2.1 billion in 2024. Capturing the impressive cash-generative ability of AppLovin's business model, the company's free cash flow as a percentage of its revenue was 72%.
The company, AppLovin CEO Adam Foroughi explained in AppLovin's fourth-quarterearnings call is benefiting from the artificial intelligence models powering its business. "And as research in AI, both internal and external, continues to improve, our business will grow with it," Foroughi added.
Such strong business momentum makes a good bull case for the stock. But investors should carefully consider the bear case before they pull the trigger.
The bear case
Despite AppLovin's impressive business momentum, I still think staying on the sidelines makes sense. Why?
First of all, the company's first-quarter revenue guidance calls for a meaningful deceleration, even after adjusting for the business it divested last summer.
For its first quarter, AppLovin guided for revenue to be in the range of $1.745 billion and $1.775 billion. When you adjust for the divestiture of AppLovin's mobile gaming business last summer, the midpoint of this guidance implies about 52% year-over-year revenue growth.
A slowdown from high growth rates like the ones AppLovin has been posting isn't abnormal. But the stock's high valuation means the stock is under a microscope. As of this writing, the advertising technology company still commands a price-to-earnings ratio of about 38. Or, put another way, AppLovin's market capitalization is $124 billion even though its trailing-12-month net income is just $3.3 billion.
Of course, if AppLovin were to continue growing at the blistering pace it was in 2025, a price-to-earnings ratio this high might be justified. And to be fair, it's possible that AppLovin does exactly this; During theearnings call Foroughi was upbeat about the company's continued business momentum.
"For the past few weeks, there's been a lot of discussion about how AI and competition will challenge our business," explained Foroughi. "But when I look at our internal dashboards, we are delivering the strongest operating performance in our history."
Further, there are reasons to stay on the sidelines with this stock beyond its decelerating top-line growth and premium valuation. Another key risk is the debate about the durability of the company's competitive advantage. Given AppLovin's monstrous free cash flow margin and its soaring top-line growth, you can bet competitors want in on the company's growth opportunity. If competition intensifies more than investors expect, this could further chip away at the company's growth rates. Additionally, even though management insists that AI is a catalyst for AppLovin's business, investors shouldn't rule out the possibility that it could morph into a threat.
Overall, AppLovin remains a great business, but its stock is arguably too risky.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
