AppLovin Shares Soar as Artificial Intelligence (AI) Drives Huge Revenue Surge. Up Nearly 400% in the Past Year, Is It Too Late to Buy the Stock?

AppLovin has been one of the biggest beneficiaries of AI.

Shares of AppLovin (APP -0.07%) jumped following its first-quarter earnings report, which saw the adtech company’s revenue surge 48% to $1.06 billion. The stock has been one of the market’s standout performers over the past year, up nearly 400%.

Let’s look at what has been driving the company’s success, if it can continue, and whether it is too late to buy the stock.

Impressive Q1 results

AppLovin’s fortunes changed for the better after the company released its Axon 2 artificial intelligence (AI)-based advertising technology in Q2 of last year. Since the release of Axon 2, AppLovin has seen its quarterly software platform revenue growth accelerate each quarter.

Its most-recent quarter was no exception, with software platform revenue soaring 91% to a record $678 million, up from 88% growth in Q4. The company’s legacy apps business, meanwhile, saw revenue rise 5% to $380 million.

The strong revenue growth has translated into big jumps in profitability as well. In Q1, AppLovin’s net income went from a loss of $4.5 million to a profit of $236 million. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, doubled to $549 million.

The company also generated $393 million in operating cash flow and $388 million in free cash flow. It ended the quarter with $3.1 billion in net debt, so this strong cash flow growth can be used to pay down debt. It also bought back 14.9 million of its shares in the quarter.

AppLovin is benefiting from the expansion of the mobile advertising market, as well as the continued adoption of real-time bidding. The latter helps the company in two ways.

First, publishers are able to show more advertisements to their customers, since real-time bidding clears auctions more quickly. Meanwhile, AppLovin only charges for real-time bidding with its Max service, which customers use to increase in-app revenue.

More opportunities ahead

The success AppLovin’s mobile gaming customers have been having with Axon 2 has led to a lot of buzz around the product within the industry. The company said this has led to a lot of new mobile gaming customers joining its platform over the past year. It said it has a lot of opportunity with these new customers, as most of these relationships are still in their early stages and have not ramped up.

AppLovin has traditionally worked mostly with gaming apps. However, the new AI engine has made it easier for AppLovin to broaden the number of advertisers it works with, given its more predictive nature and increased use of automation. This has led to more non-gaming app customers.

The company also plans to use Axon 2 to help it to move into web-based marketing and e-commerce. AppLovin is working on launching the first form of web advertising on its platform. This will be aimed at the e-commerce vertical, where many transactions happen directly on websites and not on apps. It will look to launch this new product later this quarter.

Management noted that it obviously won’t be able to drive more than 90% software platform growth each quarter moving forward, but it is looking to grow this part of the business by 20% to 30% over the long term. It said Axon 2 technology is using self-learning models, so the technology is improving.

Picture of AI.

Image source: Getty Images.

Is it too late to buy the stock?

Outside of Nvidia, AppLovin has been one of the biggest beneficiaries of AI. The release of Axon 2 AI-based advertising technology has been transformative for the company, which can easily be seen in its results.

Meanwhile, the company appears to have a long runway of growth ahead. It won’t be growing as much once it laps the initial release of Axon 2, but it should have many more years of strong growth as it expands more within newer customers and moves into other verticals.

Despite the nearly 400% rise over the past year, AppLovin shares are not particularly expensive. The company trades at only 6.5x forward sales and a forward P/E of around 18.6x.

APP PS Ratio (Forward) Chart

APP PS Ratio (Forward) data by YCharts

Given its current and potential future growth, these valuation multiples remain quite attractive. Axon 2 has been transformational for AppLovin, and despite its gains, the stock is reasonably priced. As such, it doesn’t look like it is too late to buy this growth stock, as it should have solid upside in the years ahead.

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