Applovin Set To Capitalize On AI Frenzy, Ad Growth, Analyst Cautions On Near-Term Volatility

In November, Applovin Corp APP reported third-quarter revenue of $1.20 billion, up 39%, topping the analyst consensus estimate of $1.13 billion. EPS of $1.25 beat the analyst consensus estimate of $0.94.

Despite the strong results, Goldman Sachs analyst Eric Sheridan maintained a Neutral rating on the stock, with a price target of $220.

Also Read: AppLovin’s High Valuation and Expansion Beyond Gaming Prompt Analyst Caution

Applovin’s board raised the company’s share buyback program by $2 billion. 

The company expects fourth-quarter revenue of $1.24 billion—$1.26 billion compared to the consensus of $1.25 billion. 

Sheridan’s rating reflects his view that the stock from current levels is potentially volatile on short- and medium-term results. It presents a more balanced risk and reward in a multi-year timeframe.

Sheridan recapitulated his recently hosted investor meeting with AppLovin chief Adam Foroughi, CFO Matt Stumpf, and Head of IR David Hsiao. The analyst flagged the evolution of AXON 2.0 to drive continued growth, strong operating margins, a capital-light model, and longer-term upside optionality by applying generative AI to a creative and faster cadence of developer enhancements.

Like the trends and themes from their third-quarter 2024 earnings call, management highlighted how AXON 2.0 continues to evolve as a neural net and AI platform that can improve the efficiency of its current advertising business. In addition, it demonstrated some early success around the eCommerce opportunity. The last point also aligns with some of the analyst’s early fourth-quarter advertising industry channel checks.

Despite the management team’s success in terms of revenue growth (as reflected in its market cap – shares are up 856% year-to-date), the company continues to emphasize a focus on driving operational execution in a relatively asset-light model while maintaining company culture, cost efficiencies, and returning capital to shareholders.  

While management expressed optimism about the multi-year market opportunity ahead, the key investor debate will likely remain focused on the linearity of the path forward in terms of sequential and year-on-year revenue trajectory as the platform scales, Sheridan said.

Putting aside any such quarterly short-term debates, Sheridan noted that AppLovin was positively exposed to the broader secular growth themes in advertising of AI and machine learning, increased ad budgets, and campaign efficiency.

In the coming quarters, investors are likely to continue to examine operating results for outcomes around the emerging revenue streams (into 2025 and 2026), especially regarding the ramp of the broader commerce opportunity.

On the operating fundamentals, Sheridan remained constructive that AppLovin has a collection of businesses that can produce above-average advertising and marketing industry growth (Sheridan’s fiscal 2024-2027 revenue CAGR is ~19%) and a strong margin profile in normalized mobile ads and mobile gaming landscape.

Sheridan projected fiscal 2024 revenue of $4.59 billion and EPS of $4.02.

Price Action: APP stock is up 1.3% at $371.32 at last check Wednesday.

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