AppLovin (NASDAQ: APP) stock has had an incredible uptick in 2024, with shares over quadrupling in value. Despite its massive rise, Wall Street analysts are still projecting upside in the tech stock. In October, six of the eight analyst price target changes MarketBeat has tracked are above the current share price. So, what exactly does AppLovin do, and why is the market in love with this stock this year? I’ll answer those questions and give my reading on the future for AppLovin.

AppLovin: Using AI to Maximize Mobile Game Downloads

AppLovin makes software to help businesses use their marketing spend better. The company works with mobile application developers, specifically those who make mobile games. It helps these companies by optimizing how they spend their advertising dollars to ensure that a higher percentage of people who see their ads will download their app. AppLovin generates revenue when someone actually downloads the app. This aligns interests as customers pay when their ads succeed.

After users download an app, developers often sell ads in it to make money. AppLovin provides a platform that allows app developers to find companies willing to pay the most to advertise on their app. This helps app developers maximize their advertising revenue. AppLovin also helps advertisers choose the best apps to spend their ad dollars efficiently. This helps the advertisers attract new customers and thus grow their revenue. AI algorithms power all this, allowing app developers and advertisers to best match up with each other.

All these services are in AppLovin’s software segment, which grew by 75% last quarter from the previous year. This segment took over as the company’s largest revenue generator in Q2 2023 and hasn’t looked back since. Last quarter, it accounted for 66% of total revenue.

AppLovin also makes its own mobile gaming apps. It generates revenue from purchases within an app using the “freemium” model and from selling advertisements. This was the main revenue driver for many years. However, it has declined sharply since its peak in Q4 2021. Since that peak, revenue from the segment is down 33%. Nevertheless, the company saw its app revenue grow by 7% last quarter compared to the previous year.

AppLovin Likely Has a Higher Margin Advertising Business Than Meta

To sum up AppLovin’s journey so far, the market has been really excited about the growth in AppLovin’s software segment. This is especially because the business is extremely profitable. The segment’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin has grown from 67% in Q2 2023 to 73% in Q2 2024. This is especially impressive compared to the margins of Meta (NASDAQ: META), which has one of the world's largest ad businesses.

The operating margin for Meta’s “family of apps” segment, which mainly revolves around advertising, was 51% last quarter. However, the numbers aren't fully comparable. Meta's includes depreciation and amortization costs. AppLovin's does not. Still, the 22% difference between the two provides an impressive indication of AppLovin’s ability to drive very profitable growth in this segment.

Mobile Gaming Expansion and Other Growth Avenues Provide Solid Outlook

Going forward, AppLovin’s growth will be determined largely by several factors. First, the ability to improve its algorithms to deliver strong value to customers and fend off competition. Second, to expand its software business in areas beyond gaming. And last, increasing demand for mobile games. Statista points out that the mobile gaming market is expected to grow by 6% a year through 2029, placing AppLovin in a good spot.

The other two drivers may be more difficult to achieve. Hyperscaler companies excel at developing AI algorithms. They may try to build a platform like AppLovin’s. However, it seems the company has developed a solid niche in gaming, establishing itself as a leader in the space.

The company says that its software business, when it comes to non-gaming apps, is still small. This means there is significant growth possible there, but it hasn’t manifested yet. It would be huge if it could get traction there, but again, it will have to compete with massive companies like Meta.

The stock looks somewhat pricey on a variety of valuation metrics. However, its forward price-to-earnings ratio of 32x is still below 36% of firms in the U.S. technology sector. To me, this feels like a company with strong momentum and avenues for expansion that can continue winning, even at this price.