Investment Thesis
AppLovin Corporation (NASDAQ:APP) is a mobile advertising company.
AppLovin provides services for mobile app developers and advertisers. In simple terms, it helps app developers make money from their apps by showing ads to users. In essence, AppLovin acts as a middleman between app developers who want to monetize their apps and advertisers who want to promote their products to mobile users.
The business is growing at about 28% CAGR and priced at approximately 16x forward free cash flow. This strong growth at this scale, reaching $1.5 billion, isn’t easy to achieve. But AppLovin is on a path to deliver this in 2024.
Price Target: $90 in 2025.
Rapid Recap
On 20 January 2024, I wrote an analysis titled “The Trade Desk Vs. AppLovin: Why One Is A Much Better Stock.” I argued that:
in 2024 APP will be a superior investment to TTD
This is the performance of the two stocks since then.
Important Context
A stock that has gone up a lot in a short period of time looks scary. Prone to a selloff, right?
No, that’s not right. Every stock is prone to a selloff. Always. And whether it’s up or down or sideways prior to a selloff makes no difference. You should never invest with any other assumption.
What matters is what the stock’s prospects will look like next year. That’s what’s going to drive the share price higher. Everything else is just noise.
Secondly, when it comes to investing, this waiting around for a selloff that may or may not come makes no sense. The business is either growing intrinsic value or it’s not. Perhaps it gets a bad quarter or whatever. That can’t be helped.
But to invest with fear that a stock could sell off simply because it’s already up does not make sense.
Investors will pay a higher premium (or share price) for stronger free cash flows that will increase with time. And higher still, if they have increased confidence that those free cash flows are stable, consistent, predictable, and able to grow more.
Why AppLovin? Why Now?
AppLovin plays a crucial role in the mobile advertising industry, helping businesses connect with users in a more targeted and efficient way.
AppLovin is a mobile marketing platform that specializes in optimizing and monetizing mobile applications. It provides solutions for app developers, that’s the crown jewel of the business, called its Software segment, and now makes up 60% of AppLovin’s business.
Author’s work on APP
Then, it has its other segment, called its Apps segment. This segment is a highly commoditized business. It helps customers acquire users via targeted marketing strategies (but still makes solid cash flows).
AppLovin is renowned for its advertising technology, AXON 2. The company has demonstrated its capacity to drive substantial growth and deliver superior performance solutions for its clientele.
With a robust focus on extending its performance marketing technologies to television through its CTV initiative and Array, both long-term growth opportunities, AppLovin is poised to tap into new markets and bridge the gap for superior advertising solutions in the industry.
The successful integration of AXON 2 into various business verticals, including gaming and non-gaming sectors, showcases the versatility and adaptability of the company’s technological prowess.
Growth Rates for 2024 Could Reach 28% CAGR
APP revenue growth rates
Q1 2024 points towards very strong growth rates. Given that Q1 was not a particularly low hurdle, this implies that Q2 could probably see at least 45% y/y growth rates. Similarly, I wouldn’t be surprised to see Q3 delivering around mid-20s% CAGR. Of course, Q4 2024 will be extremely challenging to come up against.
As a reference point, consider what analysis following AppLovin are expecting in terms of its revenue growth rates.
SA Premium
You can see that analysts’ expectations match my own. That’s always a nice to see consideration.
Next, we’ll discuss this stock’s valuation.
APP Stock Valuation — 16x Free Cash Flow
I believe that AppLovin’s EBITDA translates into free cash flow at approximately 70% conversation. Consequently, $350 million of free cash flow seems achievable for Q1 2024.
This would be a 24% y/y increase compared with the same period a year ago, which, needless to say, is a strong improvement. But more importantly, given that the growth rates for Q1 point to be up approximately 37% y/y, I believe that this 24% y/y increase in free cash flow implies that there may be some more operating leverage in the business to be used in future years.
One way or another, I continue to believe that $1.5 billion of free cash flow is on the cards for 2024.
Risk Factors
AppLovin’s revenue is heavily reliant on the mobile advertising industry. Any changes in this industry, for instance, consider changes in cookies or similar ad-tracking metrics, could negatively impact the company’s growth prospects.
Also, the mobile advertising sector is highly competitive. AppLovin faces competition from established companies, for example, Alphabet Inc. (GOOG) (GOOGL) as well as from emerging companies offering similar services, such as Unity Software Inc. (U).
Furthermore, the valuation of adtech companies changes depending on macroeconomic factors. If the U.S. recession didn’t have a soft landing, APP’s valuation would compress. And this would see its stock sell-off.
The Bottom Line
In my view, AppLovin Corporation stock is a bargain ready to inflect higher. The recent standout performance of the company is driven by its software platform. AppLovin strategically focuses on cutting-edge initiatives like AXON 2, its AI advertising engine, which is the engine for sustained growth.
Further, the stock’s valuation at 16x free cash flow is impressively cheap, considering its strong free cash flow profile and the potential for further operating leverage. With Q1 2024 indicating substantial growth and a projected $1.5 billion in free cash flow for 2024, I view AppLovin Corporation stock as undervalued.
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