AppLovin's stock price has exploded. Is it possible to run more?
Stocks in digital advertising and mobile video game companies App Lovin (app -2.99%) It continues to rebound toward record highs set at the height of the pandemic. The stock is up nearly 80% year to date in 2024 and more than 570% since early 2023.
AppLovin operates in two highly competitive markets: mobile video games and digital advertising. Nevertheless, this business offers everything right to make the market trust. Is that the best way to bet on the video game industry at the moment?
Is AppLovin on a long-term growth trend?
In-app advertising is big business in the vast digital advertising industry, which is rapidly approaching $700 billion annually by 2024 and is expected to grow by approximately 8% to 10% from 2023. That's because once an app is downloaded and used, consumer interest in user behavior becomes verifiable and trackable.
This industry is alphabetGoogle and meta platform (via Facebook, Instagram, WhatsApp) are the mainstream.Probably in addition to that trade deskmany digital advertising startups have struggled to maintain some form of consistent growth and profitability.
However, AppLovin is a rare and notable exception to this.
Data by YCharts. TTM = trailing 12 months.
Beyond simply riding the mass shift to digital ad spending, what's AppLovin's secret sauce?
How AppLovin makes money
As we've covered over the past few quarters, AppLovin divides its business into two major segments.
- The fast-growing software platform contributed $1.84 billion of total revenue of $3.28 billion in 2023 (up 78% year over year). In this, the AXON 2.0 AI platform powers several services.
- AppDiscovery marketing for video game and other app developers to reach mobile users.
- MAX Monetization Solution is an in-app bidding technology that runs real-time competitive auctions to provide higher ad revenue to app publishers.
- Adjust, a measurement and analysis tool for marketers.
- Wurl is an Internet-based service acquired last year that serves streaming video and ads to attract viewers.
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In addition to its use by other digital advertising companies and mobile video game publishers, AppLovin's studio has seen significant return on investment using the AXON 2.0 software platform.
AppLovin also generates impressive profit margins based on adjusted earnings before interest, taxes, depreciation, and amortization from its software platform, with adjusted EBITDA for this now-larger segment expected to reach 45% in Q4 2023. It reaches 73%. .
Is this story true?
If you're like me and have had some kind of trauma in your past with investing, unity software (U -2.31%), you may be hesitant about buying AppLovin stock. In fact, these two companies are top competitors. Unity has an app monetization platform similar to AppLovin, but it also has video game development software like AppLovin. I don't have.
But while Unity is still in the red, AppLovin has cracked the code to generate healthy profits in every way possible. First-quarter revenue guidance was $955 million to $975 million (up 36% year-over-year at the high end of guidance) and adjusted EBITDA guidance was $475 million to $495 million. . This is nearly double the $274 million in the same period last year. Margin expansion is what's left of AppLovin's game thanks to its AI platform for mobile game publishers.
And last year, much of that excess profit was used to buy back shares. Management bought back $1.15 billion worth of stock in 2023, easily offsetting $363 million in employee stock-based compensation.
Surprisingly, AppLovin stock currently trades at just 15 times Wall Street analysts' consensus estimates for 2024 earnings per share. One reason for this apparent “value” is that the company had just $502 million in cash and short-term investments at the end of 2023, while total debt is just $31 million. It was 200 million dollars.
That doesn't leave much room for acquisitions if needed to stay competitive in the mobile gaming and advertising industries.
Therefore, a cheaper forward-looking valuation is warranted for this stock. However, given the software platform's rapid rise with AXON 2.0 AI marketing tools, AppLovin remains on my watch list as a top video game stock to buy in 2024.
Suzanne Frey, an Alphabet executive, is a member of the Motley Fool's board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Nicolas Rossolillo and his clients have held positions at Alphabet, Meta Platforms, and The Trade Desk. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, The Trade Desk, and Unity Software. The Motley Fool has a disclosure policy.
