Why AppLovin Stock Surged Higher This Week

Shares of AppLovin (NASDAQ: APP), an adtech company, spiked by 12.4% this week, according to data compiled by S&P Global Market Intelligence, after the company reported better-than-expected revenue and earnings and said it would sell its gaming division.

The sale will not only generate cash for AppLovin, but allow the company to focus more on its adtech business, which is the company's fastest-growing segment.

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Investors may also be responding to the AppLovin CEO's blog post expressing interest in merging with TikTok Global (for assets outside of China). No official deal has been announced, and the company said the move is admittedly "a long shot."

Image source: Getty Images.

Investors are lovin' the company's momentum

AppLovin reported earnings per share of $1.67 in the first quarter (which ended March 31), up 149% from the year-ago quarter and ahead of Wall Street's consensus estimate of $1.45. The company's revenue of $1.48 billion also outpaced analysts' average estimate of $1.38 billion and was a 40% increase from the year-ago quarter.

Sales from the company's important advertising segment were also impressive, rising 71% in the quarter to $1.16 billion. The company's apps revenue declined by 14% to just $325 million.

But investors weren't worried about the company's app revenue decline because AppLovin announced that it's selling its mobile gaming business to Tripledot Studios. The move will give AppLovin $400 million in cash, a nearly 20% ownership stake in Tripledot, and allow the company to leave its apps business behind and focus its attention on advertising. The deal is expected to close in the second quarter.

A moonshot move

As if it weren't a big enough quarter already for AppLovin, the company's CEO Adam Foroughi wrote in a blog post yesterday that his company is pursuing TikTok Global in an effort to merge with the company, specifically for all assets outside of China.

The company said it's pursuing a merger, not a buyout, and that the combined company could boost TikTok's annual revenue from its current ad revenue of $20 billion and help it reach $80 billion annually.

But investors should know that AppLovin admits the merger proposition is a long shot. Foroughi said:

Let's be clear: this is a long shot. But building one of the world's best advertising AI models was also a long shot, yet we did it. We're not here for small bets. Our goal is to build a massive business that creates value for the world and our shareholders.

Investors should be pleased with the company's latest results and the sale of its gaming division. The company is focused on its expanding its ad business and, without or without a TikTok deal, AppLovin appears to be on the right track.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AppLovin. The Motley Fool has a disclosure policy.