Shares of AppLovin (NASDAQ: APP) jumped following its second-quarter earnings report after yet another strong quarter of revenue and profitability growth for the adtech company. The stock has been a strong performer this year, up over 75% year to date.
Let's look at what's behind the company's resurgence, if it can continue, and whether the stock is a buy.
Impressive second-quarter results
AppLovin's success stems from the release of its Axon 2 artificial intelligence (AI)-based advertising technology last year. Since then, the company has seen its quarterly software platform revenue explode higher.
This continued in the second quarter, with software platform revenue surging 75% to a record $711 million. The company's legacy apps business, meanwhile, saw revenue increase 7% to $369 million. Overall revenue climbed 44% to $1.08 billion.
Profitability has risen at an even faster pace, showing the operating leverage in the company's business as it gains scale. Gross margins for the quarter came in at 73.8%, a huge jump from 65.5% a year ago.
In the second quarter, AppLovin's net income nearly quadrupled from $80 million to $309.9 million. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), meanwhile, soared 80% to $601 million. While its software platform was the standout once again with adjusted EBITDA growth of 90% to $520 million, its apps business grew adjusted EBITDA by an impressive 33% to $81 million helped by lower user acquisition spend.
The company also generated $455 million in operating cash flow and $446 million in free cash flow. It ended the quarter with just under $3.1 billion in net debt.
Looking ahead, AppLovin forecast third-quarter revenue to come in between $1.115 billion to $1.135 billion. That would equate to growth of between and 29% and 31% and is in line with the company's long-term goal to grow revenue between 20% to 30% moving forward. It is projecting adjusted EBITDA to be between $630 million to $650 million, up from $364 million a year ago.
Image source: Getty Images.
An AI winner
AppLovin has really transformed its business over the past few years going from a company with a portfolio of apps to a leading gaming adtech company. Axon 2 has been a strong growth driver and the company said its AI models just continue to gather more data, improve, and become more accurate in identifying users to target with ads. This in turn is leading to more advertising spending from its customers and more revenue for Applovin.
The company is now just starting to move beyond its core gaming vertical into web advertising for e-commerce. This market is still in its early pilot stage but is showing promise and could be a significant growth driver next year. It also sees connected TV as being an opportunity, especially as it continues to expand its reach beyond gaming and into other segments.
Despite its transformation and solid long-term growth prospects, the company only trades at a forward price-to-earnings (P/E) ratio of under 14 times 2025 analyst estimates and a forward enterprise value-to-EBITDA (EV/EBITDA) ratio of under 11. The latter metric takes into account its net debt and removes noncash items. By both metrics, the stock is attractively price for a business growing over 25% with gross margins above 70%.
APP PE Ratio (forward) data by YCharts.
Overall, AppLovin has shown itself to be one of the best under-the-radar plays on AI. Better yet, the stock is still inexpensive, and the company is showing that it still has strong growth ahead of it, even as it begins to lap the launch of Axon 2. As such, I do not think it is too late to buy the stock even after its strong performance this year. If it can successfully move beyond the gaming vertical, the sky is the limit for this adtech company.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
