AppLovin (APP) stock plummeted in July as investors briefly turned against tech-focused investments and then recovered in early August, with the company’s stellar Q2 earnings providing some much-needed momentum. Given its earnings forecast and momentum, thanks to its AXON 2.0 artificial intelligence (AI) product, the stock looks deeply undervalued, and I’m bullish on it.
AppLovin’s Earnings Are a Catalyst
Starting with the source of its recent momentum, AppLovin, which specializes in optimizing marketing revenues for app developers and operators, delivered a strong set of results on August 7. While the company fell short of revenue and adjusted earnings per share (EPS) estimates, this report still reflects a solid performance that supports a positive outlook.
AppLovin generated $1.08 billion in revenue during Q2, a miss of $2.7 million but up 44% year-over-year. Importantly, the GAAP EPS exceeded expectations, suggesting underlying strength. This growth is accompanied by significant operating leverage, as key profitability metrics are expanding alongside revenue, indicating efficient cost management.
Moreover, investors can be reassured by the company’s guidance for Q3 revenue. Management’s midpoint forecast of $1.125 billion was above the consensus estimate of $1.1 billion.
Initially, the stock demonstrated some volatility after the earnings report. However, the bulls won out. The stock is now up over 20% since the earnings report.
Breaking Down AppLovin’s Success
How can we break down this success? AppLovin’s recent success can be largely attributed to its Software Platform segment, which has seen a 75% year-over-year increase in revenue over the past 12 months. This was driven primarily by enhancements to its AXON product.
AppLovin’s business model focuses on enabling developers to overcome marketing and monetization challenges, particularly in the mobile gaming industry, which is one of the fastest-growing segments in the app industry. Perhaps unsurprisingly, AI is really game-changing here.
AXON 2.0 — an AI-based advertising engine — significantly improves AppLovin’s ability to connect advertisers with relevant audiences. The company’s technology collects and analyzes extensive user data to optimize ad placements.
This technology extends beyond mobile gaming — AppLovin’s traditional market — reaching into areas like Wurl for connected TV (CTV) and Array for on-device advertising, thereby broadening AppLovin’s market reach.
Previously, management has been coy about what AXON 2.0 brings to the company. CEO Adam Foroughi simply said, “It’s better,” and the company didn’t provide quarterly guidance, noting that the impact of the technology wasn’t perfectly clear.
However, it’s becoming apparent that by enhancing the precision of ad targeting, AXON 2.0 increases the efficiency and effectiveness of AppLovin’s advertising solutions. The capability has led to substantial revenue growth and a positive shift in investor sentiment.
Is AppLovin Stock a Value Play?
As the above demonstrates, AppLovin is a company with momentum, both in terms of business performance and the stock itself. However, I also believe we’re looking at stock price growth that hasn’t outpaced the company’s trajectory.
The stock is currently trading at 19.4x non-GAAP forward earnings, putting it at a discount to the S&P 500 (SPX) average. That’s a really exciting figure for a company that is forecasted to grow earnings by 31.8% annually over the next three to five years.
In turn, this gives us a price-to-earnings-to-growth (PEG) ratio of just 0.61x. A PEG ratio under 1.0x typically suggests that a stock is undervalued. A PEG ratio of 0.61x suggests the stock is very underappreciated.
It’s worth recognizing as well that despite not being a household name type of stock, there are a healthy number of analysts providing earnings estimates. 14 analysts have provided an estimate for 2024 (consensus EPS of $3.38), 16 for 2025 (consensus EPS of $4.18), and nine for 2026 (consensus EPS of $5.17).
Is AppLovin Stock a Buy, According to Analysts?
On TipRanks, APP comes in as a Strong Buy based on eight Buys, two Holds, and zero Sell ratings assigned by analysts in the past three months. The average AppLovin Corporation stock price target is $99.86, implying 16.4% upside potential.
The Bottom Line on AppLovin Stock
AppLovin stock has surged following its earnings report, with the company demonstrating further revenue growth, notably on the back of its AXON 2.0 product. While the firm’s growth trajectory hasn’t been linear in recent years, the introduction of AXON 2.0 appears to be making a real difference, providing investors with greater clarity, moving forward.
Moreover, with a 0.61x PEG ratio and an average price target of $99.86, the current position appears to represent an opportunity for investors.
