AppLovin (NASDAQ: APP), a gaming and mobile advertising company, is on fire of late after delivering a mind-blowing 744% stock return to investors in the last 12 months. Comparatively, the mighty Nvidia "only" gained around 200% during the same period.
Investors are extremely optimistic about this up-and-comer thanks to its solid financial performance in recent quarters and its bright prospects riding the artificial intelligence wave. Let's see more closely why investors are so upbeat.
Image source: Getty Images.
AppLovin is already growing its profitability nicely
AppLovin might not be a household name like Microsoft and Amazon, but it is slowly gaining investors' attention of late as it crossed $100 billion in market capitalization.
For starters, the software company helps advertisers (mainly mobile game developers) reach, monetize, and grow their global audiences. Via its software platforms such as App Discovery and Max, AppLovin helps advertisers reach the right audience at the lowest cost possible, while at the same time making sure that game publishers get the most out of their advertising inventory.
For example, a new game developer relies on AppLovin (via App Discovery) to market its latest game, leveraging the software company's extensive reach of 1.4 billion mobile users globally. Over time, as the new game gains popularity among users, the game developer then leverages AppLovin's software platform (Max) to monetize their game by selling advertising slots to advertisers, many of whom are also game developers.
In other words, AppLovin provides an ecosystem that helps developers monetize their games so that the latter can focus on creating and improving gaming content.
Besides its software business, AppLovin also owns over 200 diversified free-to-play mobile games run by its own 11 studios globally. These games not only provide a good revenue source but also supply a huge and growing amount of data that helps fuel AppLovin's advertising platform. Similarly, these games can also leverage AppLovin's advertising platform to distribute and monetize their content.
Financially, the software-platform business generated 56% of AppLovin's 2023 revenue of $3.3 billion, while the gaming Apps accounted for the rest. AppLovin is also profitable, generating $357 million in net profit in 2023, up more than tenfold from $35 million in 2021.
AI is set to propel the company to another level
AppLovin's rapid expansion in net profit over the last few years has been a testament to the solid improvement in its business over the years, and that trend has continued to intensify in recent quarters. To put it into perspective, net income has surged from $109 million in the third quarter of 2023 to $434 million in the third quarter of 2024 on the back of a 39% rise in revenue to $1.2 billion.
While there are multiple reasons behind its improvement, the use (and ongoing improvement) of AppLovin's AI-powered software AXON has been a key driver. By leveraging its AXON algorithm, AppLovin helps match advertisers to users who are most likely to download their app; improves advertisers' efficiency via automation; and ultimately helps them get better returns on their investments.
As AI technology continues to improve over time, AppLovin can continue to add these new features to further improve the capabilities of its software, helping customers achieve more with fewer resources. In fact, the latest enhancement of AXON capabilities in early 2023 has contributed significantly to improving customers' outcomes, which in turn resulted in a rapid growth in AppLovin's financial performance.
On top of that, AppLovin can leverage its AI capabilities into other parts of its business to help it deliver better outcomes for customers. For instance, the tech company can integrate the latest AI technology into Wurl -- its connected TV platform -- to deliver better outcomes in distributing content and advertising solutions. Internally, the ongoing advancement of AI (such as generative AI) would help the company automate repetitive and labor-intensive tasks, making it leaner and even more profitable.
What it means for investors
One of the biggest investment themes in recent years is the impact of AI on companies and individuals. Yet, there are more ways investors can ride this once-in-a-lifetime opportunity aside from familiar stocks like Nvidia, Palantir, and C3.ai. AppLovin is a good example of how investors can look beyond these traditional names to ride the AI trend.
Should you invest $1,000 in AppLovin right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, AppLovin, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends C3.ai and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
