Grade: C — Some Red Flags, Investigate
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-19) + Yahoo Finance
Auditor: Deloitte & Touche LLP — Clean opinion
One-line verdict: AppLovin delivered one of the most explosive growth stories in ad-tech — revenue up 70% to $5.5B, operating income up 117% to $4.15B, and a 75.7% operating margin that rivals the best software companies on Earth. Only one red flag fires: goodwill plus intangibles at $1.9B equal 91% of equity. The M-Score of -2.45 clears the manipulation threshold. CFFO/NI of 1.19 confirms profits are backed by cash. Free cash flow hit $3.9B. The company divested its Apps business in June 2025, becoming a pure-play advertising platform powered by Axon AI. The 10-K reveals the critical dependency: this entire business runs on AI-driven advertising optimization on mobile platforms controlled by Apple and Google. The filing warns about "changes to the policies or practices of companies or governmental agencies that determine access to third-party platforms, such as the Apple App Store and the Google Play Store." With only 898 employees generating $5.5B in revenue ($6.1M per employee), AppLovin is an extraordinarily efficient machine — but one that could be disrupted by a single platform policy change.
| Metric | Result |
|---|---|
| Red Flags | **1** |
| Watch Items | **1** |
| Checks Completed | **17/18** (1 N/A) |
| Beneish M-Score | **-2.45** (unlikely manipulator) |
| F-Score (Fraud Probability) | **1.02** (0.38% probability) |
| Altman Z-Score | **7.87** (safe zone — no solvency risk) |
| Auditor | Deloitte & Touche LLP — Unqualified opinion |
| Fiscal Year | 2025 (ended December 31, 2025) |
| Report Date | 2026-04-05 |
The AI-Powered Advertising Machine
AppLovin operates a single core product: an AI-driven advertising platform powered by Axon AI, its proprietary recommendation engine. The 10-K describes the business model: advertising solutions that help app developers acquire users and monetize through ads. The filing notes that Axon AI's improvements compound with scale — "As we increase our scale and reach, our customers benefit from compounding improvements to Axon AI."
In June 2025, AppLovin completed the sale of its Apps business, transforming from a hybrid developer/platform company into a pure advertising technology platform. The filing reports the divestiture results: "Loss from discontinued operations, net of income taxes ($99,444)" thousand for FY2025. The company also recorded a "Gain on divestiture, net of transaction costs ($106,229)" thousand.
Revenue by geography (from the filing):
| Region | FY2025 | FY2024 | Change |
|---|---|---|---|
| United States | $2,827M | $1,726M | +64% |
| Rest of World | $2,653M | $1,498M | +77% |
| **Total** | **$5,481M** | **$3,224M** | **+70%** |
Revenue is roughly evenly split between U.S. and international markets, with international growing faster.
Headcount efficiency: With only 898 employees as of December 31, 2025, AppLovin generates approximately $6.1M in revenue per employee — one of the highest ratios for any public company. The filing notes "approximately 60% of our global employees were located outside of the U.S."
Revenue and Profitability
Per the consolidated statements of operations:
| Metric | FY2025 | FY2024 | FY2023 |
|---|---|---|---|
| Revenue | $5,481M | $3,224M | $1,842M |
| Cost of Revenue | $665M | $521M | $357M |
| **Gross Margin** | **$4,816M** | **$2,703M** | **$1,485M** |
| **Gross Margin %** | **87.9%** | **83.9%** | **80.6%** |
| Sales & Marketing | $204M | $253M | $228M |
| Research & Development | $227M | $375M | $334M |
| General & Administrative | $234M | $165M | $151M |
| Operating Income | $4,152M | $1,911M | $772M |
| **Operating Margin** | **75.7%** | **59.3%** | **41.9%** |
| Interest Expense | -$207M | -$317M | -$274M |
| Net Income (continuing) | $3,433M | $1,590M | $458M |
| EPS (diluted) | $10.04 | $4.56 | $1.26 |
The numbers are staggering. Revenue grew 70% while sales and marketing expense actually decreased 19% (from $253M to $204M) and R&D fell 39% (from $375M to $227M). This produced a 75.7% operating margin — up from 59.3% — on $5.5B in revenue.
Gross margin expanded 4pp to 87.9%, reflecting the increasingly pure software/AI nature of the business after divesting the lower-margin Apps segment.
The R&D reduction from $375M to $227M (-39%) is notable. For a company built on AI, cutting R&D while revenue grows 70% could signal either extreme efficiency or underinvestment. The filing attributes it to "a decrease in personnel-related costs, including stock-based compensation expense, as a result of a reduction in headcount."
Cash Flow: Strong and Clean
Per the filing's cash flow statement:
| Metric | FY2025 | FY2024 | FY2023 |
|---|---|---|---|
| Operating Cash Flow | $3,971M | $2,099M | $1,062M |
| Net Income (total) | $3,334M | $1,580M | $357M |
| **CFFO / Net Income** | **1.19** | **1.33** | **2.98** |
| Stock-Based Compensation | $210M | $369M | $363M |
| Depreciation + Amortization | $195M | $449M | $489M |
| AR Change | -$542M | -$467M | -$261M |
| Investing Cash Flow | +$358M | -$107M | -$78M |
| CapEx | ~$28M | ~$26M | ~$64M |
| **Free Cash Flow** | **~$3,943M** | **~$2,073M** | **~$998M** |
CFFO/NI of 1.19 confirms profits are backed by cash. The ratio is declining from 2.98 (FY2023) — this is actually expected as the company matures and SBC declines (from $363M to $210M). Cash conversion is healthy.
Investing cash flow was positive $358M in FY2025 because of the Apps divestiture proceeds ($407M), offsetting minor capital expenditures of $28M. CapEx is minimal — this is a pure software/AI business.
Key financing activities: $2.2B in share repurchases, $392M in withholding taxes on equity settlements, and $200M in debt repayment, partially funded by $200M in new debt issuance.
The Divestiture: Becoming Pure Advertising
The filing confirms: "On June 30, 2025, we completed the sale of our Apps business." The Apps segment previously contributed revenue from mobile games and consumer applications. Post-divestiture:
The $189M goodwill impairment was recognized on the discontinued Apps business — not the core advertising platform. This write-down is a non-recurring item related to the divestiture.
Balance Sheet
Per the filing:
| Metric | Dec 2025 | Dec 2024 |
|---|---|---|
| Cash & Equivalents | $2,487M | $697M |
| Accounts Receivable | $1,819M | $1,283M |
| Total Current Assets | $4,431M | $2,312M |
| Goodwill | $1,540M | $1,458M |
| Intangible Assets, net | $397M | $473M |
| Equity Method Investments | $288M | — |
| Total Assets | $7,260M | $5,869M |
| Long-term Debt | $3,513M | $3,509M |
| Total Equity | $2,135M | $1,090M |
| **G+I / Equity** | **91%** | **177%** |
Cash more than tripled from $697M to $2,487M, driven by massive operating cash flow and divestiture proceeds. The goodwill/intangibles ratio improved from 177% to 91% as equity grew from $1.1B to $2.1B — but 91% still exceeds the 50% threshold, triggering the D1 red flag.
The equity growth is dramatic: from accumulated deficit territory in FY2023 ($-1.17B retained earnings) to $1.74B in positive retained earnings by FY2025. The company went from accumulating losses to retaining $1.14B in net earnings in a single year.
Accounts receivable grew 42% ($1,819M vs. $1,283M), but revenue grew 70%, so the A2 check passes — AR is actually growing more slowly than revenue. DSO decreased 24 days.
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 121 days, -24 days YoY. Improving |
| A2 | AR vs Revenue Growth | PASS | AR +41.8% vs revenue +70.0%. Revenue outpacing AR |
| A3 | Revenue vs CFFO | PASS | Revenue +70.0%, CFFO +89.2%. Cash ahead of revenue |
| B1 | Inventory vs COGS | PASS | No material inventory (software business) |
| B2 | CapEx vs Revenue | PASS | CapEx +10.8% vs revenue +70.0%. Minimal CapEx |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 9.1%, excellent (<30%) |
| B4 | Gross Margin | PASS | 87.9%, +4.0pp. Expanding |
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.19. Cash exceeds profit |
| C2 | Free Cash Flow | PASS | FCF ~$3.9B, FCF/NI = 1.18 |
| C3 | Accruals Ratio | PASS | -8.8%. Negative accruals — conservative earnings |
| C4 | Cash vs Debt | WATCH | Cash $2.5B covers 70% of debt $3.5B |
| D1 | Goodwill + Intangibles | **FAIL** | $1.9B = 91% of equity. Above 50% threshold |
| D2 | Leverage | PASS | Debt/EBITDA = 0.8x. Healthy |
| D3 | Soft Asset Growth | PASS | Other assets -68.1% (divestiture). Normal |
| D4 | Asset Impairment | N/A | No separate write-off data (goodwill impairment was on discontinued ops) |
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill change 0% YoY. Stable |
| F1 | Beneish M-Score | PASS | M-Score = -2.45 (< -2.22). Unlikely manipulator |
Beneish M-Score Component Breakdown:
| Component | Value | What It Measures | Concern? |
|---|---|---|---|
| DSRI | 0.834 | Days Sales in Receivables — improving | Good |
| GMI | 0.954 | Gross Margin Index — expanding | Good |
| AQI | 0.645 | Asset Quality Index — hard assets improving | Good |
| **SGI** | **1.700** | **Sales Growth Index — 70% growth** | **Elevated (mechanical)** |
| DEPI | 1.224 | Depreciation Index — slowing depreciation | Moderate |
| SGAI | 0.616 | SG&A Index — extreme operating leverage | Good |
| TATA | -0.088 | Total Accruals to Assets — negative | Good |
| LVGI | 0.858 | Leverage Index — deleveraging | Good |
The M-Score is clean. The only elevated component is SGI (1.700), which mechanically reflects 70% revenue growth — exactly as expected for a hyper-growth company. Every other component is favorable. The TATA of -0.088 and SGAI of 0.616 are particularly strong, showing conservative earnings and extraordinary operating leverage.
Key Risks from the 10-K
1. Platform Dependency — Apple and Google Control Access
This is the existential risk. The 10-K warns about "changes to the policies or practices of companies or governmental agencies that determine access to third-party platforms, such as the Apple App Store and the Google Play Store, or to our advertising solutions." Specifically regarding Apple's IDFA (Identifier for Advertisers) changes and privacy restrictions that affect advertising targeting effectiveness.
AppLovin's entire business depends on being able to serve ads within mobile apps distributed through Apple and Google's app stores. Either platform could change policies that restrict advertising functionality, increase costs, or limit data access. The filing notes this has already happened with "Apple's Identifier for Advertisers (IDFA), which helps advertisers assess the effectiveness of their advertising efforts."
2. AI Algorithm Risk
The filing lists among key factors: "the timing and efficacy of improvements to our algorithms, models and Axon AI, our advertising recommendation engine, generally." If Axon AI's effectiveness degrades — whether from data restrictions, competitive pressure, or technical issues — the entire growth story unwinds. With R&D cut 39% YoY, the question is whether the company is investing enough to maintain its AI edge.
3. E-Commerce Expansion Uncertainty
AppLovin is attempting to expand beyond mobile gaming ads into "web-based e-commerce and social media." The filing states: "We have made our advertising solutions available to web-based advertisers, and while we are early in this market expansion, our new customers have experienced positive results." This is a new market with different dynamics, established competitors (Meta, Google), and uncertain returns.
4. DSO of 121 Days
While DSO improved by 24 days and is flagged as PASS (improving trend), 121 days is very high in absolute terms. It means on average AppLovin waits four months to collect receivables. The filing's AR of $1.82B on a $5.48B revenue base suggests significant collection cycle risk, especially if growth slows.
5. Dual-Class Stock Structure
The filing discloses a multi-class stock structure: "Class A, Class B, and Class C Common Stock" with Class B carrying superior voting rights. The filing notes AppLovin is "a controlled company within the meaning of the Nasdaq corporate governance requirements" — meaning governance protections that protect minority shareholders may not apply.
Key Financial Trends (3-Year)
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Revenue | $1,842M | $3,224M | $5,481M |
| Gross Margin | 80.6% | 83.9% | 87.9% |
| Operating Margin | 41.9% | 59.3% | 75.7% |
| Net Income (continuing) | $458M | $1,590M | $3,433M |
| EPS (diluted) | $1.26 | $4.56 | $10.04 |
| Operating Cash Flow | $1,062M | $2,099M | $3,971M |
| Free Cash Flow | ~$998M | ~$2,073M | ~$3,943M |
| Cash | $502M | $697M | $2,487M |
| Total Debt | $3,509M | $3,509M | $3,513M |
| Retained Earnings | -$1,170M | $599M | $1,735M |
| Employees | — | — | 898 |
Summary
Grade: C. One red flag on an otherwise remarkably clean financial profile.
AppLovin's earnings quality metrics are exceptional. The M-Score of -2.45 passes cleanly. CFFO exceeds net income. Accruals are deeply negative (-8.8%). Free cash flow of $3.9B represents 115% of net income. Gross margins expanded to 87.9%. The company went from accumulated deficit to $1.7B in retained earnings. Debt/EBITDA is 0.8x.
The single red flag:
The bigger risks are not captured by the 18-point framework:
The growth trajectory is extraordinary — 3x revenue growth in two years, operating margins expanding from 42% to 76%, and a $6.1M revenue-per-employee ratio. But this business is built on a single AI model (Axon) operating on platforms it does not control. The financial numbers are clean. The strategic concentration risk is not.
**Disclaimer**: This report is based on AppLovin's fiscal year 2025 10-K filed with the SEC on February 19, 2026. This is NOT investment advice.
**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade C means some red flags were detected that warrant investigation.