AppLovin (APP) stock has surged nearly 121% year-to-date, yet it remains cheap. Despite the surge, the stock is still attractively priced, considering how well management is executing on several fronts, including improving shareholder value and gaining market share.
Building on its strong stock performance, it’s essential to understand the foundation of AppLovin’s success. The company has a multifaceted business, and I am going to try to keep it simple. At its core, AppLovin is an advertising technology (AdTech) company that helps mobile app developers market and monetize their apps through its various software platforms, including MAX, AppDiscovery, and SparkLabs. The company has two primary segments: Software Platform and Apps.
I am bullish on AppLovin due to its strong growth, AI-powered advertising technology, expansion in new verticals, and compelling valuation.
AppLovin’s Numbers Are Stronger Than Ever
The strong financial performance AppLovin posted in Q2 2024 underpins my confidence in the company’s growth potential, especially in the Software Platform segment.
This is the segment where we have the AI-powered AXON platform, which leverages predictive modeling to help app publishers better monetize their apps. While the company’s Apps segment, which includes mobile games across casino, card, and casual, has flatlined, its Software Platform segment is in hyper-growth territory, and I expect it to continue to drive growth.
Now let’s talk about some numbers. Revenue from the Apps segment grew by 7% year over year to $369 million during Q2 2024. However, the Software Platform segment recorded 75% year-over-year growth in Q2 2024 and reached $711 million, driven by improvements in the company’s AXON technology via ongoing self-learning capabilities of its models. Overall, revenue grew nearly 44% to $1.08 billion.
Moreover, the Software Platform business has some solid margins. The segment’s adjusted EBITDA grew 91% year-over-year to $520 million, and its adjusted EBITDA margin came in at 73%. That’s impressive growth for a company that’s still trading at a cheap valuation.
Now sustaining high double-digit growth rates for long isn’t easy or realistic for any business, and management is keeping shareholders’ expectations in check. Over the long term, as the company’s proprietary models improve, the software business is expected to grow at 20% to 30%. I believe this number is more realistic and see no problem in management reaching this goal, if not exceeding it.
AppLovin’s AI Advantage Is Difficult to Replicate
AppLovin’s competitive edge, powered by AI, is another factor supporting my investment thesis. I believe competitors won’t be able to replicate it. As I said before, AppLovin has a multifaceted business, and it’s still relatively early-stage.
Moreover, AppLovin leverages data from its apps to develop models that assist publishers in displaying targeted ads to users who are most likely to engage with them. Management highlighted that advertisers have larger revenue goals and an appetite to boost ad spend. However, the company is still working on improving its AI models to help find users who will match advertisers’ revenue goals.
This defines AppLovin’s core business. The company is using its AI capabilities to help boost in-app purchases by users, and its large-scale data collection capabilities give it a solid setup.
Additionally, management highlighted that the company currently processes billions of dollars in transactional volume on its platform. With AXON still improving, there’s a lot of runway for growth.
AppLovin Is Expanding Into New Verticals
I like AppLovin’s new focus on diversifying beyond gaming to better utilize its AI capabilities. In the second quarter, the company launched a pilot project for web advertising campaigns aimed at online shops. For example, if you run an online store and use AppLovin’s platform, your ad could be shown to mobile game players, directing them to your shop and facilitating purchases.
The expansion into web advertising for e-commerce and connected TV advertising opens promising opportunities for this emerging business.
Bonus: AppLovin Will Continue to Create Value for Shareholders
I mentioned above that the company is committed to driving shareholder value. That’s something I pay a lot of attention to whenever I’m evaluating any investment. In Q2 2024, the company reduced its share capital to $334 million from $348 million a year earlier. At the same time, it increased both operating cash flow and free cash flow. By the end of Q2 2024, free cash flow reached $446 million, surpassing its GAAP net income for the quarter, which was $310 million.
Additionally, I believe management is highly incentivized to enhance shareholder value, given that insiders own approximately 34% of the company’s stock. It’s a founder-led and founder-owned business, and these businesses tend to create immense value over time. Since 2022, AppLovin has poured nearly $3 billion in share repurchases and currently has $500 million remaining under its $1.25 billion share repurchase authorization (announced in Q4 2023).
AppLovin Is Attractively Priced Right Now
Finally, the current valuation of AppLovin stock further supports my investment thesis. I believe AppLovin is a ridiculously cheap AI stock, especially when you take into account the projected growth for this year and the next year. It’s trading at 19.8 times forward earnings, a 14% discount to the sector median of 23. Moreover, analysts expect the company to grow its EPS by 247% this year and 25% next year.
Let’s just assume, and I acknowledge that this is a big assumption, that AppLovin trades at 20 times forward earnings five years from now. If AppLovin can sustain a 15% annual earnings growth rate through the next five years, its EPS will reach $6.84 and its share price will reach $137. The price target that my conservative forecast yields implies a 55% upside from current levels.
Is AppLovin a Good Buy?
Wall Street’s consensus on AppLovin stock is a Moderate Buy rating based on 8 Buy, 2 Hold, and 1 Sell recommendations. The average price target is $95.63, suggesting a potential upside of 8.4% from the current share price.
The Bottom Line
AppLovin’s business is growing remarkably, and as its AI technology improves further, the company is poised to become the top platform of choice for advertisers. Its proprietary technology for targeted advertising gives it a competitive edge, and expansion into new verticals like web and connected TV advertising highlights future growth potential.
Additionally, the stock has significant upside potential, presenting a compelling long-term investment opportunity. Therefore, I am bullish on its future growth.
