AppLovin (NASDAQ: APP) stock has swept investors off their feet with a spectacular 265% return this year. The mobile advertising technology (adtech) disrupter is benefiting from new artificial intelligence (AI) features integrated across its platform that have added to a strong growth outlook.
Following such a big rally in the share price, investors may be wondering if there is more upside ahead or whether this is the one that got away. Here's what you need to know.
As mobile devices increasingly play an integral part in our daily lives, advertising on those devices has become more important than ever.
AppLovin has quickly emerged as an adtech leader, connecting mobile app developers with marketers through a cloud-based suite of monetization tools and performance-tracking analytics. Beyond the core software ecosystem, AppLovin also counts on a portfolio of more than 200 free-to-play mobile games as a separate business driver that leverages the company's marketing capabilities.
A major development over the past year has been the launch of AppLovin Axon, an AI-powered advertising engine within the company's MAX marketplace solution, matching advertiser demand and supply through real-time auctions.
The financial trends have been impressive. In the second quarter (ending June 30), revenue crossed over the $1 billion milestone, climbing 44% year over year. The software segment revenue growth was even stronger, climbing by 75% from Q2 2023, with management citing the rapid customer adoption of the AXON platform improvements by advertising partners.
The impact is reflected in sharply higher profitability margins. Q2 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was up by 80% from the prior year quarter, while free cash flow more than doubled to $446 million. AppLovin expects the momentum to continue, guiding for Q3 annual revenue growth of around 30% and another increase in EBITDA.
The attraction of AppLovin stock as an investment is the possibility that the company may still be in the early stages of a significant long-term opportunity.
Growth drivers include the ability to enter new industry verticals building on the success of gaming as its traditional market focus. AppLovin has also launched web-based advertising tools for e-commerce, marking an entry into Adtech outside of mobile. There is also an expectation that refinements to its AI engine further add to its profitability.
That was the message from Chief Executive Officer Adam Foroughi, describing the optimism in the company's runway. In the Q2 conference call, he said:
If you start adding up the quarters to get into 20%, 30%, you want to see 5%, 6%, 7% quarter-over-quarter growth. We think we can be confident in those ranges for quite some time, we see a lot of opportunity to grow...
So we think we're going to be in a place where this business is going to be steady, it's going to be growing at a very nice rate and the conversion in cash flow is only going to improve and we've got a lot of other exciting things that are going on that give us confidence that we could even be above those ranges.
What I like about the stock is the sense that its valuation is reasonable. The stock trades at 30 times its consensus 2024 EBITDA estimate as an enterprise value (EV)-to-forward-EBITDA ratio. While this level represents a premium to smaller adtech players like Digital Turbine or Magnite with an EV-to-EBITDA ratio under 10, AppLovin stands out with its industry-leading growth.
Notably, the stock's earnings multiple remains at a large discount to category leader The Trade Desk. My interpretation is that AppLovin stock may still be undervalued and can capture some valuation expansion as a catalyst for the stock to keep climbing higher as it executes its market strategy.
I'm bullish on AppLovin and believe the stock is well-positioned to reward persistent shareholders over the long run. My only hesitation in buying the stock is a recognition that following the major share price rally, a high level of expectation for the company creates a tricky balance of near-term risks.
In my opinion, a hold rating for AppLovin is prudent for current shareholders, while investors considering buying the stock may be better off waiting for a lower entry point to add shares within a diversified portfolio.
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends The Trade Desk. The Motley Fool recommends Magnite. The Motley Fool has a disclosure policy.