AppLovin's Pivot to Pure-Play Ad Tech: How a Strategic Divestiture Could Unlock 29x Valuations

AppLovin (NASDAQ: APP) is making a bold move to shed its 1P Games segment—a decision that could redefine its valuation trajectory. By divesting its lower-margin apps business to Tripledot Studios for $400 million in cash and a 20% equity stake, AppLovin is positioning itself as a pure-play advertising technology leader. This strategic realignment could push its EV/EBITDA multiple from 26x to 29x, offsetting near-term EBITDA declines and unlocking significant shareholder value. Here's why investors should pay close attention.

The Divestiture: A Necessary Trade for Higher Multiples

The 1P Games segment contributed just 10% of AppLovin's 2024 EBITDA but dragged down its overall valuation. Historically valued at a paltry 4x in Sum-of-the-Parts (SOTP) models due to its low margins and capital intensity, this division now risks becoming a liability as ad tech peers like Unity (U) and Snap (SNAP) command far higher multiples. By offloading the segment in Q2 2025, AppLovin eliminates this valuation drag, freeing capital and focus to fuel its high-margin advertising platform, which already generates 90%+ of revenue.

Valuation Multiples: Why 29x Beats 26x

Analysts at Morgan Stanley and JPMorgan have already upgraded their price targets, citing the strategic shift. The key: AppLovin's advertising segment operates at a 76% EBITDA margin—nearly four times that of its apps division. Removing the low-margin business allows the market to revalue the company as a pure ad tech firm, akin to peers that trade at higher multiples.

Even if EBITDA dips slightly in 2026–2027 (down 1% annually due to the divestiture), the 3x multiple expansion more than compensates. At 29x, AppLovin's valuation could surge from $120 billion to $150 billion, even with modest EBITDA growth.

Structural Efficiency Gains: Cash, Focus, and Synergies

The divestiture isn't just about multiples—it's about operational simplicity. AppLovin will redirect $1.2 billion in Q1 2025 buybacks to its core business, while eliminating the games division's costs. Crucially, the company plans to reallocate $100 million in 1P ad spend to its own ad network, boosting organic growth without new capital expenditures. This creates a virtuous cycle: higher margins, lower complexity, and a clearer path to scaling web advertising—a $100 billion addressable market.

Near-Term EBITDA Declines? Don't Panic

Bearish arguments center on the 1% EBITDA dip in 2026–2027. But this overlooks two factors:
1. Multiple Expansion: A 3x jump in the EV/EBITDA multiple alone could add $30 billion in equity value.
2. Cash Flow Strength: Free cash flow hit $2.07 billion in 2024, and the Tripledot deal adds $400 million in liquidity, giving AppLovin ample fuel to buy back shares or invest in AI-driven ad tools.

The S&P 500 Exclusion: A Temporary Overhang

AppLovin's exclusion from the S&P 500 in early 2025 spooked short-term traders, but this is a paper cut, not a fatal wound. The company's $120 billion market cap exceeds 70% of S&P 500 constituents, and the decision was likely due to its dual-class share structure. As the market digests the strategic shift, this overhang will fade.

Investment Thesis: Buy the Dip Ahead of Q2's Catalyst

AppLovin's stock trades at $347.90—a 26% discount to Morgan Stanley's $460 price target. With the Tripledot deal closing imminently and Q2 earnings set to exclude the apps segment, this is a prime entry point. Key catalysts ahead:
- Q2 2025 Results: Ad revenue guidance of $1.215 billion and an 81% EBITDA margin will reinforce the ad tech thesis.
- Multiple Re-rating: Analysts like UBS and Evercore have already signaled a 29x multiple as achievable.

Final Take: A High-Margin Play with a Clear Path Forward

AppLovin's pivot to pure-play ad tech isn't just a cost-cutting move—it's a strategic reallocation of capital, focus, and investor sentiment. While near-term EBITDA headwinds exist, the structural benefits of a 29x multiple and a $2.07 billion free cash flow engine make this a compelling buy. With shares down 15% YTD and the Q2 catalyst looming, now is the time to position ahead of the valuation reset.

Recommendation: Buy APP at current levels, targeting $450–$500 by year-end. The risk-reward favors long-term investors willing to look past short-term noise.