Shares of digital advertising and mobile video game company AppLovin (APP 3.59%) continue to rally back toward all-time highs set during the height of the pandemic. The stock price is up nearly 80% so far in 2024, and over 570% since the start of 2023!
AppLovin operates in two fiercely competitive markets: mobile video games and digital advertising. Nevertheless, this business is delivering all the right stuff to make the market a believer. Is it the best way to bet on the video game industry right now?
Is AppLovin riding a secular growth trend?
Within the massive digital advertising industry -- which is quickly approaching $700 billion a year in 2024, roughly 8% to 10% higher from 2023 -- in-app ads have become big business. That's because once an app has been downloaded and is being used, there's verifiable and trackable consumer interest in the user's behavior.
This is an industry that Alphabet's Google and Meta Platforms (via Facebook, Instagram, and WhatsApp) have dominated. Besides perhaps The Trade Desk, lots of digital ad upstarts have tried but struggled to sustain any sort of consistent growth and profitability.
But AppLovin has been a rare standout exception to this.
Data by YCharts. TTM = trailing 12 months.
Besides simply riding a mass migration over to digital ad spending, what is AppLovin's secret sauce?
How AppLovin makes money
As I've covered in recent quarters, AppLovin organizes its business into two primary segments:
- Its fast-growing Software Platform, which provided $1.84 billion of the $3.28 billion revenue total in 2023 (a 78% year-over-year increase). Within this, the AXON 2.0 AI platform powers several services:
- AppDiscovery marketing for developers of video games and other apps to reach their mobile audience.
- The MAX monetization solution, an in-app bidding technology that runs a real-time competitive auction to provide higher ad revenue for the app publisher.
- Adjust, a measurement and analytics tool for marketers.
- Wurl, the internet-based service acquired last year that distributes streaming video and advertising to attract viewers.
- And the Apps business, responsible for the other $1.44 billion of 2023 revenue, which fell 18% from 2022 due to AppLovin reining in expenses to boost profitability. A few games in particular made up about 15% of AppLovin's total revenue last year:
- Project Makeover
- Matchington Mansion
- Wordscapes
In addition to being used by other digital ad companies and mobile video game publishers, AppLovin's studios are finding great investment returns by using the AXON 2.0 software platform.
AppLovin is also generating some incredible profit margins on the basis of adjusted earnings before interest, taxes, depreciation, and amortization from its Software Platform, too, with adjusted EBITDA from this now-larger segment coming in at 73% in the fourth quarter of 2023.
Is this story for real?
If you're like me and have had some past trauma from investing in Unity Software (U 2.40%), you might be gun-shy about buying AppLovin stock. Indeed, these two companies are top competitors. Unity has an app monetization platform like AppLovin does, but it also has video game development software, which AppLovin doesn't have.
However, while Unity still operates deep in the red, AppLovin has cracked the code on turning a healthy profit by all measures. The first-quarter outlook for revenue of $955 million to $975 million (a 36% year-over-year increase at the high end of guidance) was paired with adjusted EBITDA guidance of $475 million to $495 million. That's nearly double the $274 million in the year-ago first quarter. Profit margin expansion is still the name of the game for AppLovin, thanks to that AI platform for mobile game publishers.
And in the last year, much of that extra profit has gone toward stock repurchases. Management bought back $1.15 billion worth of shares in 2023, handily offsetting the $363 million in employee stock-based compensation.
Amazingly, AppLovin shares now trade for just 15 times Wall Street analysts' consensus expectation for 2024 earnings per share. One reason for this apparent "value" is that the company ended 2023 with just $502 million in cash and short-term investments, but $3.12 billion in total debt.
That doesn't leave a lot of headroom for acquisitions, should those be necessary to remain competitive in the mobile gaming and ad industry.
A cheaper forward-looking valuation is thus warranted for this stock. However, given the fast increase in the Software Platform from the AXON 2.0 AI marketing tools, AppLovin remains on my watch list as a top video game stock to potentially buy in 2024.
