AppLovin, a name that has been making waves in the stock market, is attracting a lot of attention these days. In the past year alone, its shares have skyrocketed by an astounding 900%, a testament to its remarkable performance fueled by its Q4 earnings announcement.
At the heart of AppLovin’s operations is their advertising technology platform, pivotal for mobile app developers aiming to enhance user engagement and monetize their applications effectively. Alongside this, the company boasts a collection of legacy apps of its own. A significant portion of AppLovin’s rapid expansion can be attributed to the 2023 roll-out of their Axon 2, an AI-powered advertising solution that has significantly boosted their business.
Let’s dive into AppLovin’s stellar recent achievements to assess whether this stock is still a viable investment opportunity.
### Revenue is Soaring
The Axon 2 platform continues to be a massive growth driver for AppLovin. Within its advertising segment, previously referred to as the software platform, revenue surged by 73%, reaching $999.5 million. Meanwhile, revenue from its own apps slightly decreased to $373.3 million. Overall, the company’s revenue jumped 44% to reach $1.37 billion, surpassing the $1.26 billion forecast from LSEG.
This impressive growth is complemented by a notable improvement in gross margins, which climbed from 71.3% to 76.7%. By managing to cut down sales and marketing expenses by 4%, AppLovin has managed to boost profitability even more robustly than its revenue growth.
A quick look at earnings shows a dramatic increase in earnings per share, from $0.49 last year to $1.73, far exceeding the consensus of $1.24. Adjusted EBITDA saw an impressive jump of 78% to $848 million, with the advertising sector leading the charge with an 85% rise to $777 million. The apps side of things also did well, with adjusted EBITDA growing by 27% to $71.3 million, thanks to a keen focus on cost management.
AppLovin’s operating cash flow stood at $701 million, with free cash flow just a hair shy at $695 million. Their net debt at the year’s end was $2.8 billion.
Looking forward, the company is forecasting first-quarter revenue in the range of $1.355 billion to $1.385 billion, representing growth between 28% and 31%. They predict first-quarter adjusted EBITDA to be between $855 million and $885 million, a significant jump from last year’s $549 million.
In a strategic move, AppLovin plans to sell its app portfolio for approximately $900 million, a deal expected to finalize in Q2. This sale, including $500 million in cash, will position AppLovin as a pure adtech player.
Looking toward 2025, AppLovin plans to focus on developing self-service features for advertisers, a move that aims to boost revenue growth without expanding their workforce.
The company is optimistic about its early ventures in the e-commerce sector, not just with direct-to-consumer brands. Although they anticipate e-commerce to contribute significantly by 2025, the exact timeline remains uncertain. AppLovin aims to widen their category rather than compete directly for ad spend with traditional social media platforms.
### Is Now the Right Time to Buy?
Reflecting on my previous analysis of AppLovin from last April, when the stock traded in the $70s with a forward P/E of about 17 times in 2024, it’s fascinating to see that despite a rise to around $500 today, the stock’s valuation hasn’t ballooned significantly. Currently, it trades at a forward P/E ratio of over 65 times based on 2025 EPS forecasts of $7.65.
If AppLovin successfully breaks out of the gaming niche, the stock’s potential upside remains strong, given their projection of 20% to 30% long-term revenue growth within gaming alone, thanks to industry expansion and algorithm advancements. With additional growth from e-commerce and other sectors, the current valuation could seem justified. Moving towards self-service capabilities could further enhance revenue prospects.
Additionally, the decision to offload the app portfolio sharpens the focus on their core adtech business, strengthening revenue growth potential and aiding in debt reduction.
Despite the impressive trajectory, it’s advisable for investors to consider securing some profits after the stock’s substantial gains. While AppLovin remains promising, it no longer offers the high-growth potential at a bargain as it once did. Thus, chasing the stock at this point may not be the wisest investment strategy.
