AppLovin Positioned To Become King Of AI-Powered Advertising Platforms

seekingalpha11-09

AppLovin Corp. leverages its AI-powered platform to deliver targeted, automated marketing solutions, positioning itself as a leader in next-gen advertising with substantial growth potential.AppLovin’s...

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Together, these reinforce the company's attractiveness to shareholders.Despite a high P/E ratio of 74.52, AppLovin’s 24.1% forward revenue growth justifies its premium valuation, positioning it attractively among peers for its growth potential.While I am optimistic about AppLovin's potential, it's important to remain aware of possible market corrections due to its high RSI of 89.34 and concerns about the AI bubble bursting.   Mustapha GUNNOUNI/iStock via Getty Images  AppLovin Corp. (NASDAQ:APP) is a $57 billion software company that operates a dynamic mobile marketing platform. In the last 12 months, the stock has taken on a 500% surge, significantly outperforming the S&P 500's 37% climb. Its financials also paint a picture of a rapid ascension with a 39% jump on the topline, a 188% jump on operating profit, and a 300% jump on the bottom line, all on a YoY basis, in its most recent quarterly results. With a 40% insider ownership, and a shareholder friendly approach which includes share buybacks, it is hard not to be impressed by the potential of the stock. To make things even better, its valuation seems relatively attractive, when compared to its peers in the software space. I rate the stock as a buy. Overview AppLovin operates an end-to-end Software Platform that allows its clients to meet critical KPIs such as growing their business and boosting revenue. As a tool for advertisers, AppLovin's AI-powered software platform stands out as its most significant differentiator in the advertising space, boasting a strong value proposition. It functions as a reliable recommendation engine, and simultaneously allows advertisers to automate marketing, engagement, and monetization. To keep it simple, through its software platform, APP provides its clients with sophisticated and AI-powered marketing tech that optimally ensures personalized and targeted marketing content is maximally delivered to the most appropriate target group. As part of these offerings, advertisers also receive analytics and monetization tools which help ensure value maximization (and premium pricing per impression). Powered with AXON, the company's AI engine, AppDiscovery allows smooth matching of advertiser demand with online publishing supply through a sophisticated auction algorithm that is executed in a matter of milliseconds. This advanced system is a progression from the previously inefficient mode of matching advertisers and publishers via a waterfall system to one that involves smart, programmatic bidding. Overall, the company has positioned itself to lead the next gen approach to advertising, by leveraging its advanced AI capabilities. I believe there is a tremendous growth potential here and APP has not even come close to fully tapping this opportunity. Performance Overview The company came in with strong performance during the third quarter, as its topline pushed from $864 million to $1.20 billion, denoting a 39% jump. Additionally, Q3 represents, not only the highest ever quarterly revenue total delivered, but also the seventh consecutive quarter where AppLovin brought in a sequential gain on its topline. When looking at the results in terms of the first nine months of the year, APP came in with a topline surge of over 43%. The strong growth during the quarter was driven by a surge in the company's software platform revenue which climbed by a stellar 76% in the first 9 months of 2024, compared to the prior year. The strong performance here is mostly attributed to the AppDiscovery tool, which is the most crucial in the AppLovin suite of solutions, and the most significant part of its software platform. Installations of AppDiscovery surged by 39% during Q3, highlighting its booming demand among advertisers. In addition to its remarkable growth on the software platform side, the app segments, in-app purchases and in-app advertising revenues together saw a modest climb, in the first nine months of the year, of 3% and 7% respectively, despite facing off against hard comps. This was driven by a 53% jump in advertising impressions, highlighting a higher capture in market share by the company. With this strong performance on the topline, APP came in with impressive cash generation, reporting operating cash flows of over $550 million, a record quarterly figure. Similarly, the margins too have been seeing expansion on the gross, operating and EBITDA sides, with jumps of 817, 2308, and 1865 basis points, respectively. These are extraordinary margin jumps that only reflect booming growth, and helps contextualize the 500% climb the stock has brought on in the last 12 months. With its strategic execution, and strong response from advertisers to its offerings, I believe we will continue to see improvement in its cash conversion, as well as in its profit margins. The company has already been rewarding its shareholders through share buybacks as it continues to reap the rewards of its profitable, AI-powered software platform. Since 2022, AppLovin has spent almost $3.3 billion in share repurchases, out of which more than $980 million was spent in 2024 alone. Overall, I am quite impressed by the company's recent performance, and the rapid growth its financials portray. It is clear that by working towards solidifying its position in the AI-powered advertising space, and potentially even proving to be a leader of said space, is working quite well for the company. Valuation At first glance, APP would seem like it is overvalued, with high price multiples. After all, it is trading at a trailing P/E (GAAP) ratio of 74.52, which is 132% higher than the IT sector average of 32, and a trailing PS ratio of 19.33, which is 510% higher than the IT sector median of 3.17. However, when we compare the stock to its peers in the Application Software industry, we see a very different picture: Author In the chart above, I have selected large software companies with market caps ranging from between $26 billion and $77 billion. In total, the peer group includes 14 stocks, including APP, and points to how the market has been valuing each company in terms of the revenue per share they deliver. While APP does have the 3rd highest EV/Sales ratio of 18.65 among the chosen peers, its forward-looking topline growth rate is very impressive at over 24.1%, which is also the 3rd highest on the list. As such, it would be fair to assume that the market is assigning a premium to the stock, which does seem proportionate given the higher growth potential it wields. In fact, when compared to the general relationship seen between PS ratio and topline growth anticipation, as is evident by the trend line, APP actually seems pretty attractive, and well within the buy zone. In short, despite the heavy buying of APP, especially after its recent financial results, the stock is still an attractive value play to me. As long as it's situated above the dotted line, the stock remains valuable in my eyes, and will eventually stabilize as it positions itself on the line of best fit. Risks While I am largely bullish on AppLovin', I have to point out that I have not written off the possibility of the company's strong momentum being part of a wider AI bubble. Some market pundits are even pointing out that the pop could be a lot more intense than that seen with the dot-com bubble in the late 90s, and early 2000s. If we assume that this phenomenon were to play out (which is a popular idea in the market), I think APP would see a far more noticeable plunge than a lot of its peers, particularly owing to its weak balance sheet: SimplyWall.St To add to this, the company's RSI is presently at 89.57, which signals heavy overbuying. This, once again, triggers alarm bells for me, and could potentially point to some correction in the future. So yes, while APP's 500% climb in the last 12 months is beyond impressive, and outperforms the S&P 500's comparative climb of 36% by a long shot, it could be offset hard by a plunge, if the wider market shifts to a correction mode. Takeaway  Like many industries out there, advertising is standing on the brink of a transformation that has been made possible through the possibilities of AI. With AppLovin's robust AI-powered software platform, the company stands well positioned to meet advertisers' demands for highly targeted and efficient ad placements. While the company has seen an incredible surge in the last 12 months, I think there is still a substantial growth runway it faces. 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