AppLovin’s stock has surged 628% year to date, making it the top-performing tech stock of 2024. The company’s success is largely attributed to its AI-powered advertising technology, Axon 2, which was launched in the second quarter of 2023. In the third quarter, AppLovin’s revenue climbed 39% to $1.2 billion, exceeding analyst expectations.
The company’s software platform revenue, driven by Axon 2, soared 66% to $835 million, while its apps business saw a modest 1% increase to $369 million. AppLovin’s gross margin improved to 77.5% from 69.3% a year ago, demonstrating significant operating leverage. The company reduced its sales and marketing spend by 3%, yet still achieved impressive revenue growth.
Earnings per share jumped from $0.30 to $1.25, and adjusted EBITDA climbed 72% to $722 million. The company generated $551 million in operating cash flow and $545 million in free cash flow, ending the quarter with $2.9 billion in net debt. AppLovin expects fourth-quarter revenue to grow between 30% and 32%, above its long-term goal of 20% to 30% growth.
While AppLovin’s primary focus has been on gaming customers, the company has started piloting Axon 2 with e-commerce clients.
AppLovin’s AI drives substantial growth
Early results have exceeded expectations, and AppLovin believes this vertical can become a strong contributor in 2025.
Despite the stock’s impressive run, there may still be upside potential. If AppLovin can maintain its 30% revenue growth while controlling expenses and expand beyond gaming, the company’s valuation could be justified. However, investors with significant gains may consider taking some profits while holding onto a portion of their shares.
AppLovin’s success has put pressure on the company to deliver impressive results in its upcoming earnings report. Analysts expect revenue growth of 31% to $1.13 billion and a substantial increase in profit, with EPS expected to more than triple to 92 cents. The company’s AI advertising engine, AXON, has been a key driver of growth, particularly since the release of the updated 2.0 version last year.
AppLovin’s software business, which primarily consists of advertising, jumped 75% in the second quarter to $711 million. Analysts believe that the mobile gaming advertising market could grow from $10 billion to $50 billion over the next decade, presenting a significant opportunity for AppLovin. However, the company faces potential competition from well-capitalized companies in the digital advertising space and relies on a small set of mobile platforms for distribution.
Founder and CEO Adam Foroughi’s stake in the company has soared to about $5 billion in value, a remarkable outcome considering the company nearly sold a majority stake to a Chinese investment firm in 2016, a deal that ultimately fell through.
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