AppLovin, the ad-tech company behind the popular mobile gaming platform, posted a better-than-expected third quarter, and Bank of America says an early rollout of its new AI-powered ad-targeting model helped drive the results. The company's revenue jumped 14% quarter-over-quarter to $2.19 billion, a sign that the revamped system can lift performance even before it's fully deployed.
What's driving the beat?
AppLovin's core business is helping app developers advertise their products. The company uses machine learning to match ads with users most likely to engage. Its new predictive model is designed to improve that matching further, and even a partial rollout appears to be paying off. Bank of America noted that the early deployment contributed to the strong quarter, though the company hasn't said when the full rollout will happen.
The quarter also showed a notable improvement in profitability. Gross margin rebounded by 700 basis points to 89.6%, helped by infrastructure efficiencies that offset higher computing costs. That's a key metric for investors because it shows how much of each dollar of revenue the company keeps after direct costs. A rebound like this suggests the company is managing its spending on cloud and data centers even as it invests in more advanced AI.
AppLovin's consumer apps segment, which includes its own games and apps, also performed well, with revenue up 11% to $348 million. That part of the business provides a steady base while the ad platform does the heavy lifting.
What's the outlook?
For the fourth quarter, management guided to up to about 10% quarter-over-quarter revenue growth at the top end. That's a strong projection, but the company stopped short of giving a timeline for the full rollout of its new AI model. It did reaffirm a long-term growth target of 30%, but the gap between that ambition and the uncertainty around the model's deployment is what's keeping Bank of America on the sidelines.
The bank raised its price target to $380 from $325 and nudged up its 2027 growth outlook, but it kept a neutral rating on the stock. That's a cautious stance: the bank sees the potential but wants more clarity on when the full model will be in place and how much it can boost results.
What it means for investors
After Thursday's surge, AppLovin's shares closed at $351.56, up 29.37%—a big move that brought the stock close to Bank of America's new target. When a stock jumps that much, the next leg often depends less on valuation and more on whether analysts start raising their future revenue and profit forecasts. That's harder to justify when a key catalyst—the full model rollout—doesn't have a clear date.
So what should everyday investors watch? First, any news about the rollout timeline. If the company announces a full deployment date, that could give analysts more confidence to raise estimates. Second, whether the margin rebound holds. Computing costs can be volatile, and if they spike again, the 89.6% gross margin might not be sustainable. Third, whether the model continues to improve ad performance. Early signs are good, but the proof will be in consistent results over the next few quarters.
It's also worth remembering that AppLovin operates in a competitive space. Rivals like Shopify's recent quarter show that even solid results can disappoint if expectations are too high. And while AppLovin's beat was impressive, the stock's big jump means much of the good news may already be priced in.
For context, other companies have faced similar situations. For example, Americana's profit jump still left its broker cautious on margins, and AGCO's beat was cushioned by orders. The pattern is familiar: a strong quarter can lift a stock, but sustained gains require continued execution.
Bank of America's neutral stance is a reminder that a single beat isn't enough. The company's long-term growth goal of 30% is ambitious, and the market will want to see the new model deliver on that promise. Until then, investors should expect volatility and keep an eye on the rollout timeline.
In the meantime, AppLovin's story is a good example of how AI is reshaping digital advertising. Companies that can use AI to target ads more effectively are likely to gain an edge, but the costs of running those models can be significant. AppLovin's margin rebound suggests it's managing that trade-off well, but the full test is yet to come.
