When it comes to investing in growth stocks, sometimes it is best to let your winners run. This looks to be the case with two red-hot growth companies whose stocks have performed strongly over the past year.
1. AppLovin
It's not a well-known company, but AppLovin (APP -1.12%) stock is certainly getting some attention and its price is up about 375% over the past year. The company has been a big beneficiary of artificial intelligence (AI), which helped reinvigorate its growth.
AppLovin is an adtech company whose solutions are used by mobile app developers to improve the marketing and monetization of their apps. The company also owns a portfolio of apps as well.
The company started to gain a lot of momentum following the release of its AXON 2 AI-based advertising technology in the second quarter of 2023. The new AI engine is more predictive and increases the use of automation, which is allowing AppLovin to work with a wider breadth of advertisers in different verticals outside its core gaming customer base.
The results so far have been outstanding. For the third quarter, the first full quarter AXON 2 was available, its software platform revenue surged 65% year over year to $504 million, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the segment climbed 92% to $364 million.
The momentum continued into the fourth quarter, with software platform revenue soaring 88% year over year to $576.5 million, while segment-adjusted EBITDA jumped 126% to $420 million. Overall revenue grew 36% year over year in Q4.
The company will also look to use its AXON 2 engine in other products, including one it has for connected TV, as well as for its end-to-end app management suite Array.
Image source: Getty Images.
AppLovin has also started to benefit from the shift to real-time bidding in mobile auctions. This helps the company in two ways.
First, its Max solution, which is used to drive in-app revenue, only charges for real-time bidding. Second, real-time bidding clears auctions more quickly, which allows publishers to show more advertisements to their customers. This leads to customers using AppLovin's platform more often.
Given its strong growth and momentum, AppLovin continues to look attractively valued despite the stock's surge over the past year. The stock only trades at a forward P/E of under 17x.
APP PE Ratio (Forward) data by YCharts
2. Nvidia
Another company that has greatly benefited from AI is Nvidia (NVDA 0.03%), with its stock up about 225% over the past year.
The company's graphics processing units (GPUs) are being used to power generative AI applications in data centers. While Nvidia isn't the only company to produce GPUs, its CUDA software platform has been a differentiator by allowing its GPUs to be programmed directly. This has led to Nvidia's GPUs to become the industry standard.
With the advent of AI, Nvidia's growth has been outstanding. Last quarter, the company saw its revenue surge 265% to $22.1 billion. Data center revenue led the way, soaring 409% to $18.4 billion. Data center revenue has gone from being about 40% of its revenue in fiscal year 2021 to 78% of its revenue in fiscal year 2024 ended in January.
In addition to its success with GPUs, Nvidia's networking business, most of which comes from its 2019 acquisition of Mellanox, has also been showing extraordinary growth. The business saw its revenue grow 217% in Q4. The segment ended the year with an over $13 billion annual revenue run rate. The company's Quantum InfiniBand product grew more than 5x year over year in Q4, and it is now just set to enter the Ethernet networking market with a new end-to-end solution to help AI-optimized networking in the data center.
Given that AI is still in the very early innings of adoption, Nvidia should have a lot of strong growth ahead of it with both its GPU and networking businesses. And while the stock has more than tripled over the past year, at about a 35x forward P/E, Nvidia's stock is cheap given its growth rate.
NVDA PE Ratio (Forward) data by YCharts
More upside ahead
Despite their outsized stock returns over the past year, both AppLovin and Nvidia stocks trade at attractive valuations, given their current growth outlooks. Both companies have greatly benefited from artificial intelligence, and this AI-driven momentum should continue to help drive their results moving forward. As such, both of these red-hot stocks continue to look like buys.
