Many of the top stocks that operate in the massive and rapidly growing digital advertising industry had a stellar 2023. A refocus on profitability helped, as did a rebound in global marketing activity.
AppLovin (APP 6.66%) was one of those stocks, notching a nearly 280% rally in 2023, though share prices remain down more than 60% from peaks hit in late 2021.
Headed into 2024, it appears AppLovin's management is focused on the same things that helped it mount the 2023 comeback. Here's what investors need to know about this hot digital ads software stock as it enters the new year.
Things to love about AppLovin
AppLovin divides its business into two broad categories:
- Software platform: This is the core business (58% of revenue in the third quarter of 2023) that's still in high-growth mode. The company's main product helps app developers advertise their creations to potential new users. Other services include in-app ads, as well as internet-based TV marketing integrations.
- Apps: The noncore business (42% of revenue) where AppLovin is deprioritizing growth and investment and instead generating profit. The company owns a handful of small mobile game developers, and partners closely with others for development and distribution.
AppLovin's revenue in the last reported quarter (Q3 2023) was up 21% year over year to $864 million, attributable to growth in its software platform segment, which is investing in new artificial intelligence (AI)-powered ad services for customers. Better still, net income under generally accepted accounting principles (GAAP) was $108 million in the quarter, versus net income of just $23.7 million the year prior. Free cash flow (FCF) generation was also strong last year at $708 million in the first nine months of 2023, producing an FCF profit margin of 30%.
Management has been doubling down on its profit efforts and the perceived value of the business by repurchasing massive amounts of stock. It repurchased $1.15 billion worth during the first nine months of the year, a whopping 8.2% of the current market cap (if you're looking for an equivalent to dividend yield on stock repurchase activity).
AppLovin is clearly executing very well right now, while key competitors like Unity Software have languished.
Some things that aren't so great about AppLovin
As for AppLovin's software, it is what's called a supply-side platform (SSP), which works with publishers looking to monetize their work -- in this case, publishers being app developers. An SSP represents one side of a digital ad transaction, with the other half of a transaction covered by a demand-side platform (DSP), which represents marketers looking to buy ad time. The Trade Desk has emerged as the top stand-alone DSP trying to break down the internet ad status quo dominated by the likes of Alphabet's Google and Meta Platforms.
My primary investment into the digital ads software space is The Trade Desk, as ad budgets are controlled by marketers who work with top DSPs. My investments into SSPs haven't been so great. The root cause, I believe, is ad inventory supply tends to exceed marketer demand on the internet, causing a highly fragmented group of businesses on the SSP end of the digital ad equation. This keeps me hesitant from jumping in on AppLovin, despite the clear business progress.
The balance sheet also isn't so pretty. At the end of September 2023, cash and short-term investments totaled $332 million, offset by total debt of $3.13 billion.
Time to buy AppLovin stock?
Despite some issues, AppLovin remains on my watch list. I want to see the fourth-quarter 2023 earnings report and an initial outlook for 2024's finances before I make a decision. And if I do decide to buy, I would put AppLovin stock on a dollar-cost average plan.
But there are good reasons for keeping an eye on this hot stock if digital ads are your bag. AppLovin trades for less than 18 times trailing-12-month free cash flow. It could be a long-term bargain if the company can keep making progress on growth and profit margins in 2024.
