Is AppLovin a Top AI Stock to Buy?

AppLovin Corporation (NASDAQ:APP) is an ad tech company that creates a suite of software and AI tools to assist app makers in boosting their reach and boosting monetization.

As seemingly anything artificial intelligence-related took off over the past twelve months, AppLovin been riding the coattails of the AI buzz and risen by about 330%.

Specifically, the company came into the limelight when it launched AXON 2.0 last year, which boosted its quarterly figures thereafter. AXON 2.0 is the upgraded version of AppLovin’s AXON technology that powers its AI-focused ad tech platform.

AppLovin essentially provides an algorithm to enable developers benefit from increased automation, personalization, and enhanced return on ad spend (ROAS).

So, is AppLovin a good AI stock to buy now?

How is AppLovin Performing Financially?

Over the last year, AppLovin has soared to new heights financially. Revenue increased by 17% year-over-year from $2.82 billion in 2022 to reach $3.28 billion in 2023. The prior year top line growth came in at a paltry 1% so the acceleration sparked renewed exuberance among investors.

Perhaps more notably for eagle-eyed investors was the improvement in the bottom line. Last year ended with net income totaling $356.7 million versus a net loss of $192.9 million in 2022 and net income of $35.3 million in 2021.

The company is diverting more and more cash flow to development and growth by reinvesting it in expansion and acquisitions. It also rewards long-term investors by buying back shares.

Further evidence of prosperity can be seen in the EBITDA, which was $1.5 billion at the end of 2023, a big leap from the $1.1 billion reported in 2022 and $726.8 million in 2021.

The liquidity reserves continue to grow also with $1.1 billion in net cash now from operating activities.

How AppLovin Makes Its Money

AppLovin generates revenues from its software platforms and apps. Software Platform Revenue contributed 56% of total revenue, while apps constituted the balance last year. The company’s software platforms include AppDiscovery, MAX, Adjust, and Wurl.

Future expansion hinges as much on innovation as customer retention and growth. Other levers set to accelerate the top line include expansion into other verticals, such as gaming, as well as new revenues from overseas markets. The firm’s ability to expand its client base is expect to increase revenues, cash flows and profitability.

Up until now, AppLovin’s growth can be somewhat attributed to strategic partnerships and acquisitions. For example, it invested about $4 billion in 29 strategic acquisitions and partnerships from 2018 to 2022, including the acquisition of MAX in 2018, Adjust in April 2021, and Wurl in April 2022.

Is AppLovin Worth Buying Now?

Following the surge in prices since last year, AppLovin’s valuation is elevated. The stock trades at 5.84x forward sales, a level which certainly assumes a higher sales potential than its industry peers which trade at a median P/S multiple of 2.76x.

Other crucial ratios are not at such inflated levels. For example, the forward non-GAAP price-to-earnings ratio of 15.6x and a forward non-GAAP price-to-earnings-growth ratio of 0.78x are quite reasonable. This signals that the company’s earnings growth potential may not yet be fully factored into the APP share price. 

For a technology company with the kind of explosive growth seen in the recent performance and future growth prospects, the current valuation is quite reasonable.

Still, analysts forecast the stock will fall from present levels marginally. It’s not necessarily a red flag given the share price has been so strong for such a long time now.

Is AppLovin a Buy?

AppLovin’s software platforms are largely expect to continue growing in popularity, and strong financial results should follow. 

Management forecasts that the revenue will increase to between $955 million and $975 million in the first quarter of this year, with an adjusted EBITDA margin of approximately 50% to 51%.

Besides the business expansion, the top brass clearly have a keen eye on shareholders interests, which is evident from the decision of the Board of Directors to buy back shares as part of a repurchase program. The net effect of this is to reduce share count and therefore artificially boost earnings per share figures. 

Rising EPS is a key metric that institutional investors look for when scouting for new opportunities so the predictable nature of this figure growing over time, even if it is through share buybacks, is noteworthy.

As the company laser-focuses on AI functionality to improve users’ experiences, expect tailwinds to accelerate future growth.

The stock has been providing outstanding returns over and above those of the benchmark indices. As a result, this is a position that’s well worth adding to any long-term portfolio watchlist.

Although the analysts forecast an unimpressive price movement, overall ratings from analysts remain bullish. The stock has 11 Buy recommendations, while 8 suggest waiting and 1 has a Sell rating.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.