What happened

AppLovin (APP 2.52%) beat the market by a wide margin last month. The stock rose 28% compared to a 0.55% uptick in the S&P 500, according to data provided by S&P Global Market Intelligence.

A rally in the second half of the month pushed the mobile game developer's stock back above the level where it closed its first day of trading in mid-April, though it has yet to return to positive territory relative to its $80 IPO price.

An older woman interacting with her smartphone while sitting behind a laptop.

Image source: Getty Images.

So what

Investors were happy with AppLovin's mid-May earnings update, its first as a public company. Sales spiked by 132% year over year in the first quarter. That growth came from its two biggest sales categories, mobile gaming and app marketing services. The company added to these gains with acquisitions of new brands including West Game and Cash Tornado Slots.

"Our record growth results," CEO Adam Foroughi said in a press release, "are driven by the powerful combination of our integrated business model, incorporating software, content, and data."

AppLovin didn't turn that revenue growth into profitability, though. Instead, net losses landed at $10.6 million compared to a $4.7 million net profit in the prior-year period. The company is still firmly in growth mode, and reinvesting most of its cash flow into expanding the business.

"We are able to invest a majority of our gaming revenue back into user acquisition," executives explained in a shareholder letter, "and in turn should be able to grow our app revenue faster than others."

Now what

There's still a lot about this business that investors don't know. AppLovin aims to carve out a defensible niche in a crowded gaming space. Like other app companies, it must pay a large share of its revenues to the tech giants that control smartphone platforms. Finally, privacy features in Apple's latest mobile operating system update and Alphabet's elimination of third-party cookies threaten some of the data-tracking features that have made AppLovin's business shine in recent months.

For now, though, the company is on a glide path toward achieving outsized sales growth in 2021, even after notching strong gains last year. Investors who buy AppLovin stock will be taking on significant risks, as it's still unclear whether the business can produce sustainable earnings growth. But the potential rewards might be attractive to investors who are willing to ride out the inevitable volatility.