AppLovin Is Suddenly Surging. Is It Sustainable?

Key Points

• Sales and profits are surging at the mobile advertising specialist.

• The company is expanding beyond its traditional base in mobile gaming.

• It's gaining market share on the more established digital advertising players.

• 10 stocks we like better than AppLovin ›

AppLovin (NASDAQ: APP) has been one of the biggest winners of the last few years as the adtech stock has put up monster growth and huge profit margins.

The earlier launch of its artificial intelligence (AI)-based ad platform, Axon, transformed the company from a mobile game developer to one that facilitates and manages ads on mobile games, and increasingly, other categories like e-commerce. The growth of the ad business was so strong that earlier this year, the company sold its mobile app business, becoming a pure-play adtech company.

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Over the last three years, the stock has jumped more than 3,000%, and, since Aug. 20, the stock has jumped over 50% even though there's been no major announcement since then. The company hasn't reported earnings or announced an acquisition.

In fact, the only concrete news item driving the stock higher was its admission into the S&P 500. The stock jumped 11% on Sept. 8 after the news came out that it would be joining the benchmark index, and then another 5% on Sept. 19 as it prepared to be added the following Monday.

Joining the S&P 500 not only acts as a stamp of approval for a stock from S&P Global, the manager of the index. It also triggers stock purchasing from the exchange-traded funds (ETFs) that track the index, which explains why the stock moved a second time when it joined the S&P 500.

However, that only accounts for part of the stock's gains over the last month. Let's take a look at some other factors that could be driving AppLovin stock higher.

Image source: Getty Images.

1. Its ad product is gaining market share

AppLovin's gains come while another adtech stock is notably struggling. Shares of The Trade Desk have tumbled this year as the company's growth has slowed and it's faced rising competition from Amazon and other "walled gardens." AppLovin, on the other hand, doesn't compete directly with The Trade Desk and continues to see clear skies ahead.

Jefferies raised its price target on the stock from $615 to $760 on Monday, noting that the company is gaining significant market share with advertisers. The analyst cited one ad agency, Avenue Z, that spent more of its ad budget on AppLovin, 3% to 5%, than it did on TikTok. The digital ad market, led by Meta Platforms and Google, is still massive, and AppLovin could have a lot of room to run if it can chip away at that lead.

2. Expanding beyond gaming

Last year, AppLovin announced plans to expand beyond gaming to areas like e-commerce and connected TV, and that push seems to be paying off as another analyst commented recently. It's also seeing increasing demand in international markets.

Investment bank BTIG raised its price target from $547 to $664 and maintained a buy rating on the stock on Sept. 15. The firm hiked its estimate for non-gaming revenue in the fourth quarter from $369 million to $531 million due to tailwinds like its international expansion, a new referral program, and seasonality during the holiday season.

BTIG also said that channel checks showed a 50% improvement in return on ad spend, leading to more spending from its customers.

Is the rally sustainable?

AppLovin has already pulled back about 5% from its intraday peak at $670.19 on Sept. 23, a sign that the rally may be getting overheated. The adtech company's market capitalization has jumped past $200 billion, and it now trades at a price-to-sales ratio of 39, making it more expensive than any other stock on the S&P 500, except for Palantir Technologies.

But consider its revenue growth rate of 77% in the second quarter and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 81%. Together with the favorable notes above, the current valuation seems more reasonable than it looks at first glance. Because of its wide profit margins, the stock trades at a P/E of 87, which is actually cheaper than some other growth stocks.

Still, advertising is a notoriously volatile industry and market valuations are looking stretched. If you own the stock, trimming your position could be prudent. After all, AppLovin fell more than 50% earlier this year, driven in part by the sell-off from "Liberation Day" tariffs. Over the long term, however, the fast-growing adtech stock still looks like a winner.

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Jeremy Bowman has positions in Amazon, AppLovin, Meta Platforms, and The Trade Desk. The Motley Fool has positions in and recommends Amazon, Jefferies Financial Group, Meta Platforms, Palantir Technologies, S&P Global, and The Trade Desk. The Motley Fool has a disclosure policy.