Switching Focus from Nvidia and Palantir, This AI Giant Displays a Sizable 628% Annual Surge. Will the Stock's Growth Trajectory Persist?
Switch places with Nvidia and Palantir Technologies, AppLovin (APP 6.98%) seized the lead as the top-performing artificial intelligence (AI) stock in 2024 due to the surge in share price following the release of its third-quarter results. This surge boosted the stock by approximately 628% since the beginning of the year, as of Nov. 9.
AppLovin boasts a collection of gaming apps as its primary asset, but its main operation is an adtech solution aimed at assisting mobile app developers in attracting users and maximizing their app revenue. Since the introduction of its Axon 2 AI-powered advertising technology in the second quarter of 2023, the company has experienced spectacular growth.
Let's delve into the company's Q3 performance and whether the stock remains a worthy investment.
Axon 2 drives momentum
Axon 2 has essentially fueled AppLovin's growth, as its software platform revenue skyrocketed by 66% to $835 million. Conversely, the company's legacy apps business saw revenue increase only 1% to $369 million. Nevertheless, overall revenue soared by 39% to $1.2 billion, surpassing the $1.13 billion forecast by LSEG.
The company continues to enjoy substantial operating leverage, as sales climb, with the gross margin for the quarter rising to 77.5% from 69.3% the previous year. The revenue surge also occurred despite a reduction in sales and marketing expenses by 3%.
Earnings per share (EPS) soared from $0.30 the year prior to $1.25. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, experienced a 72% increase to $722 million. Software platform adjusted EBITDA climbed by 78% to $653 million, while its apps business saw adjusted EBITDA increase by 19% to $68 million as the company optimized its operating costs.
The company generated $551 million in operating cash flow and $545 million in free cash flow. At the quarter's end, the company's net debt stood at $2.9 billion.
AppLovin predicts fourth-quarter revenue will fall between $1.24 billion and $1.26 billion. This would equate to growth of between 30% and 32%, surpassing the company's long-term goal of growing revenue between 20% and 30%. For the fourth quarter, the company anticipates adjusted EBITDA to range between $475 million and $495 million, up from $476 million the previous year.
Is the stock still a buy?
AppLovin has demonstrated its ability as a major AI success story, as its Axon 2 AI adtech platform has driven explosive revenue growth in its gaming clientele. At the same time, it has enjoyed substantial operating leverage in its business, achieving substantial growth without increasing sales and marketing expenses, while also improving its gross margin.
The company expects consistent revenue growth between 20% and 30% from their gaming customers, but it has recently begun piloting the platform with e-commerce. The company cites early results that are far above expectations and believes that this vertical has the potential to scale next year and become a significant contributor. Expanding beyond gaming offers an enormous growth opportunity for the company.
With its stock soaring by 628% since the beginning of the year, the company's forward price-to-earnings (P/E) ratio has risen to 47 based on 2025 analyst predictions. Its price/earnings-to-growth (PEG) ratio now stands at 1.28. A PEG ratio below 1 typically indicates an undervalued stock, while growth stocks often command multiples well above 1.
In numerous articles this year, I have praised AppLovin, dating back to April, while listing it among two stocks in June with the potential to display parabolic growth. While the stock and its valuation have increased significantly since then, I still believe there is potential for further gains.
If AppLovin can maintain 30% annual revenue growth while keeping expenses in check, the stock's valuation remains reasonable. Moreover, if the company can successfully expand beyond gaming with Axon 2, the sky remains the limit.
Although I think it wise for investors to take profits from their substantial gains, I would still advise holding onto the stock after its impressive share price surge.
Despite the significant 628% increase in AppLovin's share price since the beginning of the year, the company's potential for further growth remains attractive due to its AI-driven success. Investors looking to diversify their portfolio in the field of finance might consider investing in AppLovin, as its PEG ratio of 1.28 suggests it may still be undervalued.
As AppLovin continues to innovate with its AI adtech platform, like Axon 2, and expand its e-commerce clientele, it could see even more revenue growth and profitability, making it a potential long-term investment opportunity for those interested in money and investing in the technology sector.
