Morgan Stanley: Large model upgrades combined with e-commerce growth, raising AppLovin (APP.US) target price to $450

According to Intelligent Finance News, AppLovin (APP.US) countered doubts about its "growth slowdown" with a record-breaking Q3 report. Morgan Stanley maintained its "Overweight" rating in a report released on November 5 and raised its target price from $400 to $450—the core argument was not just the single-quarter numbers, but a significant model upgrade in gaming ads and rapid expansion in e-commerce.

The night before the report was released, AppLovin’s stock price rose about 23% in after-hours trading; on November 5, it officially closed up 31.04% at $356.10, though still down about 47% from the beginning of the year, with a 52-week range of $225.19—$738.01.

What made this quarter successful

According to the company's Q3 press release, for the third quarter ended September 30, AppLovin reported revenue of $2.185 billion, a year-over-year increase of 55% and a quarter-over-quarter increase of about 14%; net profit was $1.439 billion, up 72% year-over-year, with diluted EPS of $4.30; adjusted EBITDA was $1.842 billion, up 59% year-over-year, with a profit margin of 84%; both operating and free cash flows were $1.4 billion. Revenue, net profit, and adjusted EBITDA all hit new historical highs for a single quarter, and all exceeded expectations—according to Glonghui’s summary, consensus estimates had revenue at about $2.07 billion, net profit at about $1.36 billion, and EPS at $4.04.

More critical was the difference from guidance: the company had previously guided a quarter-over-quarter increase of 7%-8% for Q3, but delivered about 14%, about 6 percentage points higher than the top end of guidance; Morgan Stanley’s own forecasts were also exceeded by 5% (revenue) and 6% (EBITDA). Q4 guidance is also above consensus—revenue of $2.365–2.395 billion (up about +8%–10% quarter-over-quarter, Wall Street consensus about $2.25 billion), adjusted EBITDA of $1.995–2.025 billion with margins of 84%–85%.

Capital returns were simultaneously increased: 4.1 million shares were repurchased and withheld in Q3, costing about $1.4 billion, and the board raised its repurchase authorization by $3.2 billion to a total of $3.6 billion. According to Gulf News, CFO Matt Stumpf attributed the buyback pace to "the gap between share price and intrinsic value"; since the program’s launch, 104 million shares have been bought back at a total cost of $9.4 billion, with an average price of about $90.

Morgan Stanley’s core view: Model upgrade debunks the "slowdown theory"

Morgan Stanley analysts Matthew Cost and Brian Nowak wrote in their report that the strong Q3 results "directly challenged" market concerns that AppLovin would slow rapidly due to lack of innovation and competitive pressure. The increment mainly came from gaming: a significant model upgrade drove gaming ad revenue up about 50% year-over-year; e-commerce ad revenue grew over 100%. Management likened the technological impact of the new model architecture to "AXON 2.0" and emphasized that rollout is still partial, with particularly significant benefits for newer advertisers and categories with less data. Morgan Stanley views this as proof AppLovin can continue innovating and gaining share at considerable scale.

The report also summarized two statements from management: about 8% quarter-over-quarter growth in Q4 guidance, and a reiterated confidence in roughly 30% long-term growth opportunities. In terms of M&A, the company is focused on targets that can supplement data and advertiser relationships; Morgan Stanley judges interest in consumer-facing (e.g., social) assets to be limited.

Limits of channel research exposed

Q3 also highlighted the limits of third-party channel research. The report noted that some research had earlier suggested AppLovin might only barely meet or even miss guidance, yet the company delivered 14% quarter-over-quarter growth—in a highly fragmented market, small samples may generate misleading signals, a point management also stressed during the earnings call. According to reports, management noted that the largest digital ad platforms saw growth rates roughly between 10% and 25% over the same period—by that measure, AppLovin’s growth is still significantly ahead of the market.

Conversion rate remains the main bull thesis

Morgan Stanley’s bullish stance is not based on a single-quarter surge, but on the ceiling being far off: AppLovin’s current conversion rate of about 1.3% remains low, leaving ample room for ongoing improvement in targeting efficiency and monetization rate. The report estimates that if the conversion rate improves by about 20 basis points per year, net income in 2030 could be about 15% higher than consensus. The report also points out that AppLovin’s and Unity’s success are "not mutually exclusive"—in a fragmented market, both networks can gain share while improving advertiser returns; e-commerce is seen as an expansion of the total addressable market (TAM), not a headwind for gaming, and new advertisers are improving the monetization of low-value impressions. Morgan Stanley estimates non-gaming ad EBITDA will be about $2 billion by 2028, with gaming EBITDA at about $9 billion that same year.

Valuation, scenarios, and risks

Morgan Stanley also raised earnings forecasts: adjusted EBITDA for 2026/2027 raised by 3%/4% (to $7.02/$8.76 billion), revenue up 3%/4% (to $8.34/$10.36 billion), and GAAP diluted EPS up 4%/5% (to $15.61/$19.96). The $450 target price is based on approximately 14 times 2028E EV/EBITDA (forecast EBITDA of $10.507 billion) plus about $7.986 billion in net cash, divided by 335 million shares. The report suggests that at after-hours prices, AppLovin is trading at 14 times 2028E GAAP EPS (forecast $23.96)—"very attractive"—and continued earnings upgrades and evidence of above-market growth are potential catalysts for valuation re-rating.

Three scenario ranges: Bear case $175 (8x 2028E EBITDA $6.117 billion; revenue CAGR about 15%, EBITDA margin below 77% in 2028); Base case $450 (about 29% CAGR, margins over 80%); Bull case $650 (CAGR above 33%, margin about 91%). Notably, options-implied probabilities cited in the report (data as of November 4): the chance of dropping below $175 is about 32.9%, while the chance of breaking through $450 is only about 4.5%—a single quarter’s results do not eliminate tail risks. Downside risks listed in the report include: macro pressures worse or longer-lasting than expected, intensified competition in ad networks compressing monetization rates, loss of access to key data driving ad performance, and mobile platform policies harming the ad business.

There is not just one sell-side voice

Several institutions adjusted their targets following the earnings report, with directionally consistent moves but varying in extent and stance. RBC raised from $500 to $520 (Outperform), attributing part of the improvement to the model update delayed from Q2; BTIG raised from $396 to $450 (Buy); Wedbush raised from $560 to $600 (Outperform); Evercore ISI raised from $510 to $540 (Outperform); Needham maintained $475 (Buy); Goldman Sachs raised to $445 but maintained Neutral; Scotiabank analyst Nat Schindler, on the other hand, cut his target from $515 to $450 and kept Outperform—he noted that the debate has shifted from "whether AXON is effective" to "whether recent performance can be replicated," which actually favors AppLovin. According to Refinitiv data, about 79% of covering institutions rate the stock as Overweight, 21% as Neutral, and none as Underweight.

Unresolved issues remain. As reported, the Q2 report in August triggered a 28% after-hours drop due to both revenue growth and guidance missing expectations, and subsequent securities class action accusations asserted management overstated technology sustainability, with the lead plaintiff determination scheduled for mid-November; market consensus for 2027 growth has already retreated to about 25%.