AppLovin Shares Surge as Revenue Continues to Soar. Is It Too Late to Buy the Stock?
Key Points
AppLovin recorded strong third-quarter results and issued upbeat guidance.
The stock remains cheap even after the big rally.
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Shares of AppLovin (NASDAQ: APP) spent much of this year in the doghouse as investors worried about rival Unity Software's (NYSE: U) progress. AppLovin missed second-quarter expectations after its model performance failed to improve at its usual pace. However, the stock surged after its third-quarter results zoomed past expectations.
Given the adtech company's growth and valuation, AppLovin still looks like a buy after this rebound. Let's dig into its results and prospects to see why the artificial intelligence (AI) stock still looks like a good buy.
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AppLovin's strong growth continues
AppLovin has been one of the biggest beneficiaries of using AI to drive growth in its core business, with the launch of its AI adtech platform, Axon 2.0, in 2023 being a game changer for the company.
Image source: The Motley Fool.
This was on full display once again in the third quarter as revenue soared 55% to $2.18 billion. That topped the $2.07 billion analyst consensus, as compiled by Bloomberg.
The growth was driven by both improvements in its core gaming business and its start to gain momentum in the consumer industry. Its gaming business grew nearly 50%, fueled by the partial rollout of the transition to a new model.
It said the current model transition that it is undergoing is as meaningful as the launch of its AXON 2 platform and that it enhances performance in areas where there isn't as much data, such as with newer advertisers, smaller advertisers, and in newer categories like the consumer space. It said advertiser performance was strong in the quarter, with customers seeing higher profitability on their ad spending, leading to an increase in ad budgets.
Meanwhile, CEO Adam Foroughi said that any success competitors were seeing was not impacting its growth. He said that this is not a zero-sum game and that their improvements benefit the market as a whole.
AppLovin's newer consumer vertical saw revenue grow by triple digits year over year in the quarter. This business continues to add runway, and the company believes this vertical will help the overall company compound at 30% annually over the long term.
Adjusted earnings per share (EPS) also came in above expectations. EPS from continuing operations climbed 76% from $2.39 a year ago to $4.30, topping the consensus by $0.26. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) climbed 59% year over year to $1.84 billion.
The company also continues to generate a ton of cash. In the quarter, it generated free cash flow of $1.4 billion. It ended the quarter with just over $340 million in net debt, down from $1 billion at the start of the year. Management also repurchased 4.1 million shares in the quarter, worth $1.4 billion, taking advantage of its weak stock price.
Looking ahead, AppLovin projected fourth-quarter revenue between $2.365 billion and $2.395 billion, representing growth of 43% to 44%. The guidance easily surpassed the $2.25 billion analyst consensus. It guided for adjusted EBITDA to be between $1.995 billion and $2.025 billion, representing growth of between 43% and 45%.
The stock is still a buy
AppLovin showed that one quarter does not make a trend, with its results and guidance both coming in well above analyst expectations this time around after a rare second-quarter miss. The company continues to deliver robust growth in its core gaming ad segment, while the newer consumer segment shows promise. Meanwhile, it looks like the new model improvements have strong potential to keep growth climbing.
Despite the rebound in the stock, it remains cheap given its growth, with a forward price-to-earnings ratio below 18 times 2027 analyst estimates even after the huge surge in its price. As such, I don't think it's too late to buy it, with AppLovin still trading at a multiple well below where it has been in the past.
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Geoffrey Seiler has positions in AppLovin. The Motley Fool has positions in and recommends Unity Software. The Motley Fool has a disclosure policy.
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