Switch Your Attention to The Trade Desk's Rival, the Preferred Adtech Shares on Wall Street
Switch Your Attention to The Trade Desk's Rival, the Preferred Adtech Shares on Wall Street
When digital advertising company The Trade Desk (TTD -1.56%) went public in 2016, few comprehended its operations. Even now, a minority probably comprehends its business. However, those who investigated the company and purchased shares have been handsomely rewarded. The Trade Desk's stock has soared over 4,000% since its IPO, as of this writing.
The digital advertising sector is expanding rapidly. For instance, video and audio content are being consumed more frequently through streaming. Consequently, a digital advertising solution is required.
The Trade Desk operates by partnering with advertisers, working within their budgets to place ads across various content publishers. Ads are auctioned off in split-seconds, and The Trade Desk targets the audience demographics that the advertiser is pursuing branded on data it gathers from the publisher.
This business model has led to remarkable revenue growth. Investors have been eager to buy The Trade Desk stock, leading to a high valuation for the company.
However, a new Wall Street darling in the adtech space has emerged. While it took The Trade Desk around eight years to escalate from a market capitalization of about $1 billion to over $60 billion today, AppLovin's (APP 1.92%) market cap is swiftly climbing toward $100 billion, leaving The Trade Desk in the dust.
AppLovin has become Wall Street's newest obsession in the adtech space for several reasons.
Software revenue YOY growth
Why is AppLovin stock exploding?
28%
In August 2022, it appeared that AppLovin's management was ready to throw in the towel. It proposed a merger with Unity with terms more favorable to Unity. Unity's shareholders would have the majority of the value, AppLovin co-founder and CEO Adam Foroughi would relinquish his role in favor of Unity's CEO, and Unity's board of directors would make up the majority of the new board.
65%
Unity declined AppLovin's unsolicited proposal. And in the very next quarter, AppLovin reported a 2% year-over-year dip in revenue. For perspective, the company's revenue had risen 90% in the prior-year period. In summary, it seemed like the business was faltering, as indicated by its slowing growth rate. It's no wonder AppLovin's management wanted out.
76%
However, those paying close attention noticed something transformative happening beneath the surface with AppLovin.
91%
It turns out that AppLovin has two main components to its business. Initially, its more significant part was its mobile app business. The company had its own portfolio of mobile games. However, according to management, this part of the business was not its ultimate goal. Instead, it was merely trying to gather as much first-party data as possible to build artificial intelligence (AI) algorithms for its software business.
75%
In the same quarter that its revenue dropped 2%, AppLovin's software revenue skyrocketed by 59% year over year. The company's customers are mobile app developers looking to monetize their apps. They turn to AppLovin, which uses its AI software to place the right ads in the right places.
66%
In the second quarter of 2023, AppLovin launched an upgraded version of its software called Axon 2.0. Here's a look at AppLovin's software revenue growth since then.
| Quarter | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 || --- | --- | --- | --- | --- | --- | --- || Software revenue YOY growth | 28% | 65% | 76% | 91% | 75% | 66% |
To put it mildly, Axon 2.0 accelerated AppLovin's growth. In short, mobile app companies using the new version of its software have seen remarkable improvements in their return on investment, motivating them to increase usage even more.
Moreover, AppLovin's software has not only sparked its growth rate but also has impressive profit margins. Over the past 12 months, the company has $1.7 billion in free cash flow, which is around a 40% margin. Few businesses can match this.
This explains AppLovin's stock's impressive surge.
What's next for AppLovin stock?
While the past is important context, investors are really interested in what's next for AppLovin stock. There's an encouraging closing thought here.
AppLovin's customers are primarily mobile gaming app developers. However, management believes that it's time to expand into new app sectors. Currently, it's testing a launch into the e-commerce app sector. And early results are promising.
By branching out into new app sectors, AppLovin's management believes it can increase revenue at an annual rate of over 20% from here. If it can preserve its profit margins along the way, AppLovin stock could have even more upside.
The success of AppLovin has attracted the attention of investors, leading to a significant increase in its market capitalization. To finance its expansion into new app sectors, AppLovin may consider venturing into the world of finance and investing in strategic opportunities.
Investors are eager to see how AppLovin's expansion into e-commerce apps will impact its revenue and profit margins. If successful, this move could drive further growth for AppLovin stock, potentially outpacing the remarkable growth it has already demonstrated.