Move over Nvidia And Palantir Technologies, AppLovin (NASDAQ: APP) became the best-performing stock in artificial intelligence (AI) in 2024 thanks to the price increase following the release of third-quarter results. The price jump has sent the stock up about 628% this year as of Nov. 9.
AppLovin owns a portfolio of gaming apps, but its main business is an adtech solution to help mobile app developers attract users and better monetize their apps. Since launching its Axon 2 AI-based advertising technology in the second quarter of 2023, the company has experienced explosive growth.
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Let’s take a closer look at the company’s Q3 results and whether the stock is still a buy.
Axon 2 has been the source of nearly all of AppLovin’s growth, with revenue from the software platform increasing 66% to $835 million. The company’s legacy apps business, meanwhile, saw revenue rise 1% to $369 million. Total revenue rose 39% to $1.2 billion, exceeding the consensus of $1.13 billion as compiled by LSEG.
The company continues to see tremendous operating leverage in its business as revenue increases, with gross margin for the quarter improving to 77.5%, compared to 69.3% a year ago. The sales increase also came despite the company cutting its sales and marketing spend by 3%. That combination is quite remarkable.
Earnings per share (EPS) rose to $1.25 from $0.30 a year ago. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), meanwhile, rose 72% to $722 million. Adjusted EBITDA for software platforms rose 78% to $653 million, while the apps business grew adjusted EBITDA 19% to $68 million as the company optimized the business’s cost structure.
The company produced $551 million in operating cash flow and $545 million in free cash flow. It ended the quarter with net debt of $2.9 billion.
AppLovin expected fourth-quarter revenue to be between $1.24 billion and $1.26 billion. That would represent growth of between 30% and 32% and is above the company’s long-term target of growing sales by 20% to 30%. Adjusted EBITDA will be between $475 million and $495 million in the fourth quarter, compared to $476 million a year ago.
Image source: Getty Images.
AppLovin has proven to be one of the biggest AI winners, as its Axon 2 AI adtech platform has led to rising revenues among its gaming customers. At the same time, the company has seen tremendous operating leverage, allowing it to achieve massive growth without increasing sales and marketing spend and improving gross margin.
The company expects consistent growth of between 20% and 30% from its gaming customers, but it has also just started testing the platform with e-commerce. The company says initial results are above expectations and that it believes this industry can scale up and become a strong contributor next year. Going beyond gaming is a huge potential opportunity for the company.
With the share price up about 628% year to date, the company’s forward price-to-earnings (P/E) ratio has risen to 47, based on analyst estimates for 2025. The price-to-earnings-growth (PEG) ratio is now 1.28. A PEG ratio of less than 1 is considered undervalued, and growth stocks will often have multiples well above 1.
Graph APP PE ratio (1 year ahead).
I’ve written positively about AppLovin several times this year, as far back as April, while in June I mentioned it as one of two stocks I thought could go parabolic. While the stock and its valuation have soared since then, I think there’s more upside potential ahead.
If AppLovin can continue to grow revenue at 30% while keeping costs under control, its valuation is reasonable. If it’s able to go beyond gaming with Axon 2, the sky remains the limit.
While I think it’s wise for investors with big gains to take some profits, I would still hold the stock even after this incredible price rise.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in AppLovin, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Move over Nvidia and Palantir, this AI giant is up 628% year to date. Can the stock’s momentum continue? was originally published by The Motley Fool
