Is AppLovin Stock a Buy as Revenue Continues to Surge?

Outside of the infrastructure space, one of the biggest artificial intelligence (AI) winners has been AppLovin (NASDAQ: APP). The adtech platform has driven tremendous growth since the introduction of its Axon 2.0 engine in 2023, and that growth has shown no signs of letting up when the company recently reported its first-quarter results after the bell on May 6.

Despite its continued strong operational performance, the stock is still down around 25% year to date. However, it is up 40% over the past year and up more than 750% over the past five years.

Let's take a closer look at its Q1 results and prospects to see if the stock is a buy.

Strong growth continues

One of the most impressive things about AppLovin's run since the introduction of Axon 2.0 in 2023 is that not only has it helped drive revenue growth, but it's also helped expand its margins significantly. This continued in Q1, with the company growing its revenue by 59% to $1.84 billion, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins expanded by 400 basis points to 85%. Its gross margins came in at 89%, up from 86.8% a year ago.

This helped drive strong profitability growth, with earnings per share (EPS) from continuing operations soaring 70% from $2.10 a year ago to $3.56, while adjusted EBITDA climbed 66% year over year to $1.56 billion.

AppLovin is also generating a ton of cash, which it is using to buy back shares. In the quarter, it generated free cash flow of $1.3 billion. It then repurchased 2.2 million shares worth $1 billion.

Meanwhile, the company has more growth potential ahead as it is set to open its self-serve platform to the public in June to broaden its advertising customer base. In the past, the company has operated a closed managed service ecosystem, generally only open to large gaming app developers. Self-service will make its platform available to smaller advertisers and those in other verticals, greatly expanding its market opportunity.

The company's newer consumer vertical is also showing solid progress. It saw 25% growth in March compared to January, and in April, it hit a record in consumer ad spending. Meanwhile, AppLovin sees the move toward gaming developers using more hybrid monetization models -- showing ads in addition to in-game purchases -- as big potential tailwinds for its core gaming business.

Looking ahead, AppLovin management projected Q2 revenue to be in a range of $1.915 billion and $1.945 billion, representing growth of between 52% and 55%. They forecasted adjusted EBITDA to be between $1.615 billion and $1.645 billion.

Image source: The Motley Fool.

Is it time to buy AppLovin stock?

Few companies have shown the ability to use AI to drive growth in their core business to the extent that AppLovin has over the past few years. Its ability to consistently grow revenue by more than 50% while, in many cases, reducing operating expenses is extraordinary.

While the company has had a lot of doubters and several short reports written about it, there is no denying that its numbers are impressive. Meanwhile, with the company introducing a self-serve platform and opening it in June, there is the potential for its growth to start accelerating from here.

Turning to valuation, Applovin trades at a forward price-to-earnings (P/E) ratio of under 30 based on 2026 analyst estimates, with a price/earnings-to-growth (PEG) ratio of just 0.5 times. A positive PEG ratio below 1 is generally considered undervalued, and growth stocks will often have PEG multiples above 1.

Between its valuation and the growth it has ahead, the stock looks like a solid buy at current levels.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.