Why AppLovin Stock Skyrocketed in September, Rising More Than 50%

Key Points

• Multiple analysts raised their price targets for the advertising technology company late last month, driven by optimism surrounding Axon Ads Manager.

• Investors are likely increasingly viewing AppLovin as an artificial intelligence play, given the growing role of AI across its products.

• After the surge, the tech stock's valuation looks rich, warranting some skepticism from investors.

• 10 stocks we like better than AppLovin ›

Shares of AppLovin (NASDAQ: APP) rose 50.1% in September, according to data from S&P Global Market Intelligence. The climb reflected growing optimism ahead of the company's Oct. 1 product event, which unveiled a self-serve ads platform aimed at e-commerce and other non-gaming advertisers (the company already has a strong foothold in gaming).

Leading up to the event, a string of bullish analyst actions late in the month bolstered investor sentiment for shares of the advertising technology company. In addition to boosting their price targets for the stock, the analysts expressed optimism for the upcoming expansion of its platform.

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Expanding its addressable market

Late last month, Wall Street leaned in. Multiple analysts raised price targets and highlighted AppLovin as a top idea, citing strong demand for the company's next wave of AI-powered ad tools and a broader push beyond gaming advertisers. The anticipation centered on "Axon Ads Manager," a self-serve portal designed to reduce manual onboarding and open the platform to more e-commerce brands.

That anticipation culminated on Oct. 1, when AppLovin began rolling out Axon Ads Manager on a referral or invitation basis -- a timely move aimed at capturing holiday-season budgets and making it easier for non-gaming marketers to buy on the platform. The company also emphasized Axon as the artificial intelligence (AI) engine powering its ad matching.

The setup followed solid summer fundamentals. In early August, AppLovin reported 77% year-over-year top-line growth in the second quarter. In addition, its net income margin expanded from 44% in the year-ago period to 65%, helping its bottom line soar 164% year over year to a substantial $820 million for the quarter.

Looking ahead

After September's rally, AppLovin now trades at an extremely high valuation. Shares trade at a price-to-earnings multiple of 88 as of this writing. Clearly, there are high expectations for Axon's adoption, e-commerce penetration, and continued margin expansion for the overall company.

From here, investors should watch three things. First, the Axon Ads Manager rollout pace -- particularly how quickly referral-only access broadens and how many non-gaming advertisers start spending meaningfully. Second, investors should focus on fundamentals, looking for sustained revenue and free cash flow growth at high rates throughout the holiday quarter and beyond. Finally, keep an eye out for competitive response across ad tech -- especially as rivals court the same e-commerce budgets with their own AI-assisted tools. If the uptake of the new Axon Ads Manager is slower than expected, or the macroeconomic environment prompts markets to tighten ad budgets, shares could underperform; the valuation multiple leaves little room for disappointment.

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Daniel Sparks and his clients have 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.