The company appears to have launched extremely effective software that’s boosting its business.
Share prices of app monetization company AppLovin (APP 1.14%) jumped 20.5% in August, according to data provided by S&P Global Market Intelligence. The company reported financial results for its second quarter of 2024 on Aug. 7, showing both impressive growth and robust profit margins.
AppLovin creates its own apps and also has software to help other companies monetize their apps. Regarding this software, the company launched a new version last year that’s powered by artificial intelligence (AI). It’s been a resounding success, fueling impressive growth. Q2 software revenue was up 75% from the prior-year period, lifting overall revenue by 44%.
AppLovin’s software platform is very high margin and it’s lifting the financials for the overall business. In Q2, the company reported net income of $310 million and free cash flow of $446 million. Not only did both of these figures more than double from last year, but they also represent impressive margins of 29% and 41%, respectively.
Investors are hard-pressed to find a business that is growing as fast as AppLovin while simultaneously sporting profit margins this big. And it’s why the stock continued to climb in August.
Are there any reasons to worry about AppLovin?
For the upcoming third quarter, AppLovin’s management expects to grow revenue by about 30% year over year. That’s a big drop-off from its growth of 44% in Q2. But investors should note that it’s already lapped the anniversary of its new software and consequently no longer has that one-time boost. Seeing 30% growth more than a year after making the improvements is still impressive.
That said, one interesting wrinkle with AppLovin’s finances is that its cash is going down even though it’s generating a ton of free cash flow. The company has reduced its share count, which is good. But its debt has modestly increased over the last two years and its cash has gone down.
APP Cash and Short Term Investments (Quarterly) data by YCharts
At $3.5 billion, AppLovin’s long-term debt is substantial and management will need to address it in coming years. Moreover, it pays considerable stock-based compensation, which would dilute shareholder value if management wasn’t buying back so much stock. It’s not necessarily a problem, but debt and stock-based compensation explain why there isn’t as much cash leftover as one might expect.
What should investors do now?
I believe AppLovin remains a top business — any company that can profitably grow its top line at over 30% is worth keeping an eye on. My concern today is that the stock has more than doubled so far in 2024 and about half of the gain is because the valuation got more expensive.
Valuations can fluctuate. So the valuation could pull back with AppLovin stock. Therefore, I wouldn’t necessarily be surprised if it underperformed for a season. But zooming out further, this company is doing some impressive things in the app economy and is worth keeping a close eye on, especially if it can maintain its impressive profit margins.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
