Consider the possibility of investing in this AI stock with millionaire-making potential, rather than opting for Palantir.
Palantir Technologies (PLTR), at 2.29%, might be one of the sizzling stocks of 2024, but I think it's worth considering another scorching AI software stock that investors should explore as well. AppLovin's (APP) stock price has skyrocketed over 650% this year, surpassing Palantir's impressive 250% increase (all figures as of the time of writing).
Although Palantir is grabbing headlines due to its successful implementation of its data collection, analytics, and AI platform by both the U.S. government and commercial entities, AppLovin's operations have been flying under the radar. Despite its roots in a legacy gaming app business, the company's primary focus lies in advertising technology employed by mobile gaming companies and others for user attraction and monetization.
With solid reasons to dig deeper into this stock, even after its substantial gains this year, read on.
Robust Growth
AppLovin has achieved phenomenal revenue growth since the introduction of its AI-powered adtech platform, Axon-2, in Q2 2023. Last quarter, its software revenue skyrocketed 66% year-over-year to reach $835 million, while its total revenue rose a remarkable 39% to $1.2 billion.
Impressively, the company has shown significant operational leverage, contributing to even stronger profitability growth. The quarter witnessed improvements in gross margins, which soared to 77.5% from 69.3% the previous year, along with a 3% decrease in sales and marketing expenditures.
These developments resulted in a substantial increase in earnings per share (EPS) to $1.25 from $0.30 a year ago, with adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) jumping 72% to a staggering $722 million.
Looking ahead, AppLovin anticipates long-term revenue growth of between 20% to 30% from its gaming clientele. If it can expand its adtech platform beyond gaming, the company has room for even more growth. In fact, it has stated that it can achieve growth rates in excess of 30% in the gaming segment if it manages to implement multiple major enhancements to its adtech platform each year.
Beyond gaming, AppLovin has embarked on pilot projects to explore the broader e-commerce sector, where it has reported positive results. It plans to launch a self-serve platform in the upcoming quarters. If the company can innovate swiftly and extend its platform past the gaming sector, it should continue to experience impressive revenue growth for years.
Attractive Valuation
Despite its stellar performance this year, AppLovin still offers an appealing valuation. Based on projections for the following year, the stock trades at a forward price-to-earnings (P/E) ratio of approximately 45 times and a price/earnings-to-growth (PEG) ratio of 1.1 times. Though growth stocks often trade at PEG multiples exceeding 1, a PEG ratio below 1 is often perceived as undervalued. In essence, AppLovin appears to be a good buy at its current PEG ratio, considering its long-term growth prospects.
When compared to Palantir, AppLovin offers a more affordable valuation. Whereas Palantir trades at 40 times next year's revenue, AppLovin trades at 45 times next year's earnings. In addition, AppLovin has been experiencing revenue growth at a faster pace. Last quarter, it reported a 39% revenue increase, while Palantir only saw a 30% rise.
Back in December 2022, investors could have acquired AppLovin stock for less than $10. An investment of $35,000 in this period could have grown to over $1 million in less than two years if investors had held on to the stock.
While such returns are unlikely to be repeated in the future, I still believe AppLovin could be a worthwhile investment for investors looking to construct a high-value portfolio. I initially wrote favorably about the stock back in April, when it had soared 375% in the past year, and its momentum remains unabated. Although its valuation has gone up since then, its growth prospects remain promising, and the stock is still not overpriced.
Given AppLovin's impressive revenue growth and operational efficiency, investing in its stock could be a strategic move in the finance sector. The company's forward P/E ratio of approximately 45 times and PEG ratio of 1.1 times suggest an attractive valuation, making it a potential undervalued growth stock.
Furthermore, AppLovin's aggressive expansion into the e-commerce sector and planned launch of a self-serve platform could propel its revenue growth in the coming years. This, coupled with its more affordable valuation compared to Palantir, makes it a compelling option for investors seeking high-value stocks in the finance domain.