Meet the Monster Stock That Continues to Crush the Market

Key Points

• This stock has more than tripled in value in less than a year.

• During this time, however, sales have nearly doubled while profits have more than doubled.

• Despite criticisms meant to send the stock lower, the only major risk here is a little short-term profit-taking pressure.

• 10 stocks we like better than AppLovin ›

As the old adage goes, past performance is no guarantee of future results. That's why you should never count on a red-hot stock remaining hot after you jump in. Indeed, an overperforming ticker is often at above-average risk of a pullback.

Every now and then, a stock that's beating the daylights out of the market merits a closer look. That doesn't inherently mean it's a buy; it's rising for a reason and might be worth a shot.

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With that as the backdrop, here's a closer look at AppLovin (NASDAQ: APP), a stock that's been soaring since April and is now deep into record-high territory as a result. The thing is, the underlying reason for this extreme bullishness actually makes sense. The question is, how long can the rally last at its current pace?

Image source: Getty Images.

What's AppLovin?

On the chance you've never heard of it, here's the simplest explanation: AppLovin helps companies promote their mobile apps.

That's the simple description anyway. Here's a more detailed explanation: AppLovin provides a handful of tools that help developers leverage the power of artificial intelligence (AI) to ensure their app is being exposed to the consumers who are most likely to download it. These tools obviously include the paid advertisements you'll often see while using a similar app, but the company's technology can also plug into the reach of connected television. AppLovin adds value by also offering ad-creation tools and by helping its clients measure the effectiveness of their ad campaigns and then make any necessary adjustments.

It may not seem like the company does anything that isn't already offered by other digital advertising outfits, such as Yodel Mobile, Moburst, PreApps, and App Radar.

It is different in one incredibly important way though; its AI-powered Axon platform appears to have mastered the art and science of connecting apps with the consumers who are most likely to be interested in them or to make a purchase through a shopping app. There may be no platform better at doing this than Axon.

The irony? Like any other AI algorithm, the longer that AppLovin's Axon operates, the better it gets. Sure, competition could eventually creep in, but this company's developmental lead is wide. App developers may not be interested in switching to an alternative either, given that they've already figured out how to get the best results out of Axon.

Pushing through the slings and arrows

The company's results underscore just how powerful AppLovin's solutions are. Its second-quarter revenue was up 77% year over year, extending a growth pace that's been in place since early last year. The organization's profitable too, turning its Q2 top line of $1.26 billion into operating net income of $772 million, more than doubling the year-ago comparison. The analyst community is looking for the same absolute pace of dollar-based growth this year and next as well, with AppLovin widening its profits in step with this growth.

Data source: Simply Wall St., MarketWatch, CNBC. Chart by author.

Yes, that's the chief reason AppLovin stock seems to have suddenly sprung into action in late 2024. Although it was performing well enough before then (overcoming its post-pandemic lull), last November's fiscal Q3 report delivered a clear message: Axon is the solution that app developers and promoters have been waiting for. Shares have rallied more than 300% since then, with the majority of that gain being logged just since July in response to its solid Q2 numbers and in anticipation of equally impressive Q3 results slated for release in just a few weeks. For comparison, the S&P 500 is only higher by 17% for the same time frame, and its rally appears to be slowing since the middle of this year.

Big run-ups like these invite big profit-taking as well as criticisms that turn these hot stocks into short-selling candidates. An outfit called Muddy Waters took its shot in March, followed by June's doubling-down of a previous claim by short-selling specialist Culper Research. To be fair, both organizations raised reasonable concerns. Muddy Waters claims AppLovin is "impermissibly extracting proprietary IDs" as a means of delivering better-targeted ads, while Culper alleges close ties with a Chinese national that's not been disclosed by AppLovin.

Neither outfit was able to disrupt the stock's rally for very long. Again, APP shares have more than doubled in value just since early July, as investors decided the bearish insinuations didn't hold enough water. The biggest concern here remains ordinary profit taking following such a rapid run-up. Indeed, this ticker's recent red-hot bullishness is enough reason to wait for a sizable pullback before diving in.

Be patient but not stubborn

Just don't wait too long or get too stingy about your entry price if you want in.

Yes, drama has fueled the stock's bullish momentum and vice versa. This can make it tough to get a handle on what a ticker's actually worth and when -- or if -- it will finally level off and start trading more like an actual growth stock and less like a game of "chicken" (where whoever flinches first loses). And sure, AppLovin's AI-driven approach to promoting apps and products may at times be uncomfortably aggressive.

The business itself is legitimate. AppLovin provides a much-needed service and does so in a manner that is superior to any alternative. That may not be the case forever, but it's certainly the case now. Moreover, in light of Straits Research's expectation that the worldwide mobile app development market is set to grow by an average yearly pace of 12% through 2033, while the mobile-marketing industry is set to expand at an average annualized rate of 18% for the same time frame, there's plenty of opportunity for this company to maintain or even widen its competitive lead. That's why the vast majority of the analysts covering this stock still rate APP stock a strong buy even if shares are now trading well above their consensus price target of $601.32.

Just buckle up if you're going to dive in even if you're waiting for a healthy pullback. This kind of drama-driven volatility doesn't simply vanish overnight. It's apt to be a wild ride for a while.

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James Brumley 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.