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SUMMARY
Parkev Tatevosian, CFA, analyzes AppLovin's recent financial results, highlighting its exceptional profitability and robust revenue growth. Despite a significant year-to-date stock price decline, he upgrades his rating from hold to buy based on improved valuation and sustained performance.
MAIN POINTS
- AppLovin's stock is down nearly 30% year-to-date despite strong financial performance.
- The company reported a 59% year-over-year sales increase and executed substantial share buybacks in the first quarter.
- Management forecasts continued revenue growth and maintains industry-leading profit margins exceeding 70%.
- While AppLovin's recent profitability is exceptional, it lacks the long-term track record of companies like Visa.
- Analysts expect revenue growth to decelerate over the next five years, but total revenue is projected to nearly triple by 2030.
- With valuation metrics returning to attractive levels, the stock is upgraded from hold to buy based on intrinsic and market multiples analysis.
DETAILED ANALYSIS
AppLovin has demonstrated remarkable financial performance, with its latest quarterly results showing a 59% increase in sales year-over-year, reaching $1.84 billion. The company's operating cash flow was $1.3 billion, resulting in an operating cash flow margin of approximately 72.5%, which stands out as one of the highest among publicly traded companies. Management's confidence in the business is evident through aggressive share buybacks, spending nearly all operational cash flow on repurchasing stock in the first quarter.
This level of buyback activity, especially when the stock is perceived as undervalued, signals strong conviction in the company's future prospects.
Profitability remains a key highlight, with AppLovin posting an operating profit margin of 75.8% over the trailing twelve months. This margin surpasses industry leaders like Visa, which has historically maintained margins in the mid-60% range. However, AppLovin's track record of such high profitability is relatively short, spanning only the past two years, whereas Visa has sustained its performance over a decade.
The durability of AppLovin's profitability will be tested in the coming years as the company matures.
Looking forward, Wall Street analysts project a slowdown in revenue growth rates, from 50% in the current year to 12-15% by 2029-2030. Despite this deceleration, AppLovin's total revenue is expected to nearly triple, reaching $17.3 billion by 2030. This continued expansion, combined with industry-leading profit margins, is likely to drive significant profit growth.
Valuation has become more attractive, with forward price-to-earnings and price-to-operating-cash-flow ratios dropping to around 27.5, levels not seen since earlier lows. Updated discounted cash flow analysis places intrinsic value close to the current market price, suggesting the stock is fairly valued on a fundamental basis and undervalued on market multiples. Given these factors, the stock rating has been upgraded from hold to buy.
LINKS
- YouTube channel membership page for exclusive perks and content.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on a 6-step investing framework.
- Fiscal.ai investment research platform with a viewer discount.
- Webull investing platform sign-up page with bonus shares.
- Substack newsletter subscription for monthly investing insights.