AppLovin (NASDAQ:APP) reports third-quarter results in early November, and the question hanging over it is whether the company can keep growing this fast. In the second quarter, revenue rose 53% to $1,924 million, and net income grew even faster.
Yet the stock is priced as if that pace is about to fade. At about 16 times forward earnings, AppLovin sits far below the multiple it has averaged over the past five years. The facts support a view that the discount is wider than the business justifies, though one weakness keeps that view from being a strong one.
AppLovin sells advertising software that works for the advertiser. Its AI-powered platform, called AppLovin Ads, helps businesses decide where to place their ads, and the company’s quarterly filing says substantially all of its revenue comes from it. That makes the platform both the engine of the story and its main risk. If you’re interested in AI investing, we recently compiled a report on 10 Undervalued AI Stocks to Buy Now.
Most Sales Turn Into Profit
Over the past 12 months, AppLovin’s operating margin was about 78%. In the second quarter, its adjusted EBITDA margin reached 84%. A margin that high usually means each added dollar of sales costs the company very little to earn, which is the clearest sign of an edge in the software itself.
Free cash flow backs that up at $863.3 million for the quarter, and management put part of it into buying back the company’s own shares. Sales are also spread across regions: U.S. revenue was $989.6 million in the quarter, and the rest of the world brought in $934.1 million.
Revenue grew about 30% a year over the past five years, so the latest quarter came on top of a long record. The same quarter a year earlier brought in $1,259 million, far below this year’s. For investors looking for profitable software names, our list of 10 Most Profitable Software Stocks to Buy Right Now is worth a look.
Everything Rides on One Product
The fair objection is concentration, since the filing ties substantially all revenue to AppLovin Ads. It also names e-commerce as a new market the company hopes to win, which is a goal rather than a result so far.
Guidance also points to a small step down in margin, with management expecting an adjusted EBITDA margin of 83% in the third quarter, below the second quarter’s level.
That margin move is too small to change the view. Concentration does cap it, because a stumble in one product has nothing to cushion it. A shareholder owns one very profitable engine, with the next one still unproven. Two things would settle the question: e-commerce turning from a stated goal into revenue the company reports, and margins holding near their current level as the platform grows. Investors who want more beaten-down names can see our ranking of 10 Stocks Investors Are Running Away From.
What the Price Already Assumes
On adjusted earnings, the forward multiple of about 16 sits about 25% above its sector’s median and about 45% below AppLovin’s own five-year average. So the stock costs more than a typical company in its sector, but far less than investors have usually paid for it. On a stricter GAAP basis, the multiple would look somewhat higher.
That price assumes growth fades much faster than the latest quarter suggests. For a shareholder, it leaves room for some slowing before the numbers disappoint. If you’re looking for cheaper growth names, check out 10 Undervalued Growth Stocks to Buy Now.
Early November’s report will show whether last quarter’s growth was a speed-up or a peak. AppLovin has earned the benefit of the doubt on profit, but it hasn’t yet shown a second source of revenue. Revenue inside the guided range of $2,055 million to $2,085 million, with the margin near 83%, would make a deep discount to history harder to defend.
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This article is originally published at Insider Monkey.
