“We are cautious on near-term business fundamentals and long-term competitive positioning,” one Wall Street analyst wrote near the beginning of last year, when AppLovin’s shares were $11. He initiated coverage at “Sell” and predicted a fall to $7.
AppLovin dates back only to 2012, making it younger than Apple’s Siri.
Oopsie. Now they’re $280.
Anyone can get a stock call wrong. I mention the analyst, still the only bear on AppLovin, according to FactSet, partly to distract readers from asking why I’m writing about the stock so late. (The answer—and I’m outraged about it—is that I can’t actually tell ahead of time which stocks are going to rocket higher. It’s a real career hindrance.) Also, things in this case have happened quickly. More than $100 of the stock’s climb has come this month.
Let’s quickly try to answer three questions: What’s an AppLovin, and why is it suddenly worth $100 billion? Is there any way that investors could have seen this coming? And how does the stock stack up now?
AppLovin dates back only to 2012, making it younger than, say, Siri on the iPhone. There’s a 2007 movie called Superbad, wherein a high schooler seeking to buy alcohol secures a fake Hawaii driver’s license with his photo and the name McLovin. This was not the inspiration for the name, unless it was subconscious, co-founder and CEO Adam Foroughi has said. “AppLovin” was just a quick, playful idea that happened to be available as an $8 domain name.
The company has a software platform that helps app developers, mostly game makers, reach new users who will download the apps and become paying customers. At the heart of it is a recommendation engine powered by artificial intelligence called Axon. The company can also help app owners grow in-game advertising revenue. And it has a couple of hundred of its own casual games, which make money and generate valuable user data.
AppLovin’s AI is getting smarter, which is driving better results for customers and rapid growth for itself. Third-quarter results, reported Nov. 6, showed revenue rising 39% to $1.2 billion, and adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, jumping 72% to $722 million. Free cash flow was $545 million, up 182%. As Foroughi explained days before in a fireside chat with investors, he had difficulty early on selling his idea to venture capitalists, so he has run AppLovin from the start to maximize free cash flow, not revenue growth.
The stock debuted in April 2021, and closed down 18% on its first day, at $65 and change. There was a pandemic glut of game makers going public. Plus, app gatekeepers like Apple were rolling outnew rules on user privacy, which were seen as a threat to the data tracking that online advertising relies upon. In 2022, AppLovin paid about $1 billion for a marketing unit of Twitter, just before postpandemic ad spending by game makers slumped. Shares fell below $10 near the end of the year.
Early in 2023, AppLovin launched Axon 2.0, and although the engineering improvements were a black box, performance improvements since then have been clear, and shares have been climbing. What has investors particularly upbeat now is the company dipping a toe outside of games into e-commerce. “It’s the best product I’ve ever seen released by us, fastest growing,” said Foroughi on the latest earnings call. Financial results there, he said, are likely to make an impact next year and beyond. That has some investors comparing AppLovin to digital advertising specialist Trade Desk, although AppLovin is already larger by stock market value.
How could investors have spotted AppLovin stock sooner? I suppose that regular screens for price momentum would have helped; the action picked up starting around September. Screens for earnings-day outperformers might have been useful, too. AppLovin beat earnings estimates by double-digit percentages in its past six quarterly reports, and shares responded with double-digit gains after five of them.
The aforementioned lone bear on Wall Street has brought his price target up to $66. Cracking e-commerce will be challenging, he wrote back in August, especially because AppLovin lacks the first-party data that it gets in gaming from owning its own titles. Also, he wrote, look for Apple to tighten privacy rules further and make a bigger move itself into advertising technology. That’s a key risk, although AppLovin has so far navigated tracking changes nimbly. And Apple must be careful about being seen as using its vast market share to stifle competition.
UBS’s analyst made a prescient AppLovin upgrade to Buy from Neutral at about $116 in September. He’s still bullish. One thing that isn’t yet baked into expectations, he wrote this month, is a potential launch in the future of a self-service platform for advertisers. Alger portfolio manager Amy Zhang calls AppLovin one of her favorite stocks. Since incremental costs are modest, she says, much of the revenue growth turns into free cash.
The latest Wall Street consensus has AppLovin generating free cash flow of $2.4 billion next year, which puts its recent $100 billion stock market value at a lofty 41 times that figure. Too much? Zhang has a cheaper idea, but not by much. She also likes a company half the size that does power and cooling for AI data centers, called Vertiv Holdings. That one goes for around 35 times next year’s projected free cash flow. Don’t worry: It’s not up 2,600% since the beginning of last year, like AppLovin. Only 800%.
By the way, hitting a $100 billion market value used to be a big deal. General Electric was America’s first in 1995. Now one-fifth of S&P 500 companies are that large. A rising number over time is to be expected, but the median company in the 12-digit club now goes for 25 times this year’s projected earnings. Maybe AI is about to unlock untold new riches for most of them. Or maybe prices are just stretched.
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