Analyst resets AppLovin stock forecast on hidden metric
AppLovin has already become one of Wall Street's more closely watched artificial-intelligence advertising stories.
The company's growth has been fast enough to raise a different question for investors: How much more can it squeeze out of mobile ads after such a large run?
Morgan Stanley says the answer may come down to a hidden metric inside AppLovin's (APP) advertising engine.
In a Morgan Stanley note given to TheStreet, analyst Matthew Cost and team reiterated an Overweight rating on AppLovin and a $720 price target. That target sits well above AppLovin's May 22 closing price of $481.68. The firm also laid out a $1,100 bull case if one key operating metric keeps improving.
Morgan Stanley sees a bigger AppLovin runway
Morgan Stanley's bull case centers on conversion rates, or how often an ad shown through AppLovin leads to an install or another desired consumer action.
The firm says about 99% of AppLovin's ads still do not convert. That sounds like a weakness at first glance, but Morgan Stanley frames it as the central reason AppLovin may still have more room to grow.
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AppLovin's business has already been expanding at a sharp pace. The company reported first-quarter revenue of $1.84 billion, up 59% from a year earlier. Net income rose to $1.21 billion, while adjusted EBITDA increased 66% to $1.56 billion.
The company also guided for second-quarter revenue of $1.915 billion to $1.945 billion and adjusted EBITDA margin of 84% to 85%.
That performance gives Morgan Stanley confidence that AppLovin's ad technology is already working. The bigger issue is whether the company can keep improving the efficiency of that technology.
Morgan Stanley estimates AppLovin's conversion rate has risen from 1.0% to 1.3% over the past 18 months. The firm said AppLovin still trails market leaders such as Meta by a wide margin on a comparable "true" conversion-rate basis.
A small change could have a large impact
Morgan Stanley's note argues that a modest conversion-rate improvement could produce a much larger revenue result.
The firm estimates that every 10-basis-point increase in AppLovin's conversion rate could drive 17 points of net revenue growth, assuming other variables remain stable.
If AppLovin continues to improve conversion rates by about 20 basis points per year, Morgan Stanley says net revenue could grow at roughly a 34% compound annual rate through 2030, even if gross spend stays flat. Under that scenario, revenue and EBITDA could land about 50% above consensus by 2030, putting the firm's $1,100 bull case in play.
In its first-quarter 10-Q, AppLovin said it generates all of its revenue from Axon Ads Manager, its AI-powered demand-side advertising product. The company said Axon deploys advertiser capital at return targets and that revenue is presented net of advertising inventory costs.
The company also said Axon Ads Manager makes up the vast majority of revenue and is used by clients to automate, optimize, and manage customer acquisition. AppLovin said it grows revenue by improving its technologies, including the Axon AI recommendation engine.
AppLovin's Axon engine is doing the heavy lifting
AppLovin's first-quarter results showed that the company is already getting more revenue out of each install.
In the 10-Q, AppLovin said revenue rose $683.5 million from a year earlier, largely because of improved Axon Ads Manager performance. Net revenue per installation rose 93%, partially offset by an 18% decline in installation volume.
That is why Morgan Stanley's note puts so much weight on better targeting rather than just broader ad volume.
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The firm says AppLovin's AXON model remains the main driver of conversion-rate improvement. It also points to AppLovin's move into web advertising and non-gaming categories as potential drivers, since a wider mix of ads could reduce repeat exposure and improve conversion.
Morgan Stanley expects non-gaming ad verticals to drive most of AppLovin's dollar ad revenue growth going forward as the company expands into new categories.
That backdrop gives AppLovin a path to keep outgrowing the broader in-app advertising market, but it also makes the stock more dependent on continued improvement from its advertising technology.
The bull case still has risks
Morgan Stanley's upbeat case comes with clear pressure points.
The firm said AppLovin could fail to maintain its historical pace of technology improvement, which would make it harder to outgrow the broader in-app advertising market. It also flagged the risk that AppLovin's web advertising push could slow, reducing a key source of ad diversification.
Competition could also become a problem if demand for in-game inventory pressures AppLovin's spreads.
AppLovin has already told investors that it must continue to innovate and stay ahead of changes in the advertising and mobile app ecosystems for its results to keep improving.
Related: Morgan Stanley spills beans on what's next for AppLovin stock
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This story was originally published May 28, 2026 at 9:03 AM.