Summary

• AppLovin's pivot to a pure advertising business has been highly prudent, attributed to the high-growth trend and richer profit margins.

• Combined with the double beat FQ4'24 performance and promising FQ1'25 guidance, we can understand why the stock has outperformed as it has.

• Even then, readers must note that APP has yet to fully develop its advertising system and "lacks the full self-service capabilities needed to handle growth at scale."

• Combined with the inherently lumpy advertising cadence and tougher YoY comparison from the lower political ad spending, we are likely to see its near-term performance underwhelm.

• This is also why APP's premium valuations are likely to be a double-edged knife, if the management is unable to deliver against the consistently raised forward estimates.

jamievanbuskirk

APP's Success Story Deserves To Be Awarded, Just Not This Much

We previously covered AppLovin (NASDAQ:APP) in December 2024, discussing how its promising e-commerce advertising results had driven its stock price up by +718% on a YTD basis, well outperforming the wider market and its ad-tech peers.

Even so, with the stock increasingly expensive while being buoyed by momentum, we had believed there was no margin of safety at those inflated levels, since FY2025 was also likely to suffer from tougher YoY comparisons.

APP 1Y Stock Price

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Since then, APP has proven us wrong again by charting an impressive stock price return of +44.6%, well outperforming the wider market at +0.8%, thanks to the double beat FQ4'24 performance and the promising FQ1'25 guidance.

For reference, the ad-tech company reported FQ4'24 revenues of $1.37B (+14.1% QoQ/+44.2% YoY), adj EBITDA margins of 61.7% (+1.7 points QoQ/+11.8 YoY), and adj EPS of $1.73 (+38.4% QoQ/+253% YoY).

Most importantly, APP's high-growth advertising revenues of $999.48M (+19.6% QoQ/+73.3% YoY) and extremely rich adj EBITDA margins of 77.7% (-0.5 points QoQ/+4.9 YoY) compared to that of the Apps segment at $373.29M (+2.8% QoQ/-0.9% YoY) and 19.1% (+0.7 points QoQ/+4.2 YoY), respectively, underscore why the pivot to the e-commerce advertising market has been a great move after all.

This also explains why the management may have chosen to divest its Apps business, given the slowing topline growth and the diluting impact on its bottom-lines.

If anything, APP has gone one step further to feed the exuberance by offering a robust FQ1'25 advertising revenue guidance of $1.04B (+4% QoQ/+55.2% YoY) and adj EBITDA margin of 78.3% (+0.6 points QoQ/+5.8 YoY), well exceeding the consensus estimates, with it underscoring why the stock has outperformed as it has on a one-day basis.

Given the promising early results, we can understand why the management has sought to diversify its advertising verticals beyond gaming "to serve the entire global advertising economy," significantly aided by the "demand from advertisers wanting to join our platform is high."

APP's nascent advertising opportunity is why it has been able to report accelerated growth against the global digital advertising market growth at +10.9% to $667.58B in 2024, with it underscoring its intermediate term high-growth profile.

The same has been observed in the ad-tech company's extremely promising "$3 million in run rate adjusted EBITDA per employee in our Advertising business" in FQ4'24, compared to $1.5M in FQ3'24, with this strategic internal performance metric likely to drive operational efficiency along with bottom-line expansion moving forward.

The Consensus Forward Estimates

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These reasons are likely why the consensus has already raised their forward estimates, with APP expected to generate an accelerating top/bottom-line growth profile at a CAGR of +20.7%/+30.7% through FY2027.

This is compared to the original estimates of +10.5%/+22.2%, while building upon the 3Y historical trend at +19%/+59.8%, respectively, with it underscoring the ad-tech company's renewed growth opportunities through the e-commerce advertising market.

APP Valuations

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These reasons may also be why the market has upgraded APP's FWD P/E non-GAAP valuations to 51.66x, up drastically from the 5Y mean of 29.76x and the sector median of 25.24x.

Assuming that the ad-tech company is able to deliver on the massively upgraded forward estimates, it seems that the stock is finally trading reasonably at FWD PEG non-GAAP ratio of 1.30x as well, despite the notable upgrade from the former's 3Y mean of 0.29x.

The same conclusion may be derived after comparing to APP's advertising/ad-tech peers, including Meta (META) at 1.62x, Alphabet (GOOGL) (GOOG) at 1.24x, Digital Turbine, Inc. (APPS) at 2.51x, and The Trade Desk (TTD) at 2.52, aside from Perion Network (PERI) at 0.35x, with it implying the former's profitable high growth trend ahead.

So, Is APP Stock A Buy, Sell, or Hold?

APP 3Y Stock Price

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For now, APP has reached new heights of the $470s ranges as it continues to run away from the 50/100/200 day moving averages, with it underscoring the market's insatiable appetite for high growth AI SaaS success stories.

Much of the tailwinds are naturally attributed to the company's ability to deliver on outsized expectations, despite the consistently raised forward estimates.

This reason is also why APP's stock price gap continues to widen to our prior fair value estimates of $125.20 offered in our last article, based on the FQ3'24 annualized GAAP EPS of $5.00 (+40.4% QoQ/+316.6% YoY) and the FWD P/E GAAP valuation of 25.05x then (nearer to its sector peers).

Based on the raised FY2027 GAAP EPS estimates from $6.11 to $12.71, it goes without saying that the stock has also run away from our updated long-term price target of $318.40.

APP's embedded premium valuations and baked in upside potential are also why we would like to advise caution, however.

For reference, APP's ad-tech peer, TTD has had an extremely painful -32.9% one-day correction, attributed to the management's "series of small execution missteps," the subsequent FQ4'24 top-line miss, and the underwhelming FY2025 guidance.

This development naturally highlights the fact that a stock's premium valuations/outsized price performance come with high expectations, one that may be a double edged knife once those expectations are not met.

At the same time, while APP may have had early successes in the ecommerce advertising segment, it remains to be seen how things may develop in the near term, since the company has yet to fully develop its advertising system and "lack the full self-service capabilities needed to handle growth at scale."

This is on top of the fact that the advertising business is inherently lumpy as some of its competitors guide tougher YoY comparison in FY2025 attributed to the lack of political ad spending.

This is also why we are likely to see APP report a lumpy FY2025 performance, worsened by the potentially ramped up operating expenses from the ecommerce advertising development and the divestiture of its legacy Apps business.

As a result of the numerous moving parts and the immense baked in premium, we prefer to maintain our Hold rating here. Otherwise, investors whom got in early during our two Buy ratings in May 2024 and September 2024 should simply enjoy this winner's ongoing run up.