The Nasdaq Composite is a broad-based tech-centric index that tracks the performance of more than 3,000 stocks listed on the exchange. The Nasdaq-100 is a subset of that index, tracking the performance of roughly 100 of the largest non-financial companies on the Nasdaq stock exchange, spanning a variety of sectors.
To be considered for inclusion in the Nasdaq-100, a company must meet the following criteria:
- Be listed exclusively on the Nasdaq exchange
- Be highly liquid
- Must have been listed on an eligible exchange for at least three full calendar months
- A minimum of 10% of its outstanding shares must be available for trading
- Must not have filed for bankruptcy
AppLovin (APP -3.33%) is the most recent addition to the Nasdaq-100, joining the benchmark on Nov. 18, replacing discount retailer Dollar Tree. It's worth noting that its inclusion came outside of the index's annual rebalancing, which occurs on the second Friday in December. Rules for the index allow select additions to take place at any time.
Since early last year, the stock has surged 3,250% (as of this writing) as the company harnessed artificial intelligence (AI) to inform its in-app gaming advertising. Despite that impressive run-up, many on Wall Street think there's still a long runway ahead. Below, I'll review the secret to AppLovin's success and what lies ahead.
Image source: Getty Images.
AI-powered algorithms
AppLovin went public in early 2021 with the mission to help app developers succeed. The company developed a comprehensive set of tools dubbed AXON -- powered by artificial intelligence -- that help businesses get their apps noticed in an otherwise crowded marketplace, while automating and optimizing the monetization of those apps.
According to the company, most developers lack the "marketing, monetization, and data analytics tools required to stand out" in a sea of mobile apps that number in the millions -- particularly mobile games. Furthermore, many app developers tend to benefit from including advertising in their apps, but most lack the expertise to do this effectively, so AppLovin does the heavy lifting. The company also helps advertisers reach their target market, which is also a win for developers.
AppLovin gets paid when users download an app, so when their customers succeed, AppLovin succeeds. The company's track record is impressive. Since its inception, the platform has fueled over 6 billion mobile-app installs for developers.
The company's success was evident in its third-quarter results. Revenue of $1.2 billion jumped 39% year over year, while its diluted earnings per share (EPS) of $1.25 soared 317%. This helps illustrate that with the infrastructure in place, each new customer adds incrementally to AppLovin's bottom line.
The company also increased its outlook, calling for fourth-quarter revenue of $1.25 billion, which would represent year-over-year growth of 31%, though AppLovin has a long track record of surpassing management's guidance.
Management has expressed confidence that it can achieve 20% to 30% growth "for the foreseeable future" from mobile game advertising alone, which would be reason enough to be bullish on the stock. However, AppLovin is expanding into new verticals that could supercharge its future growth.
For example, the company is currently piloting an e-commerce advertising solution, and the results are encouraging. On the earnings conference call, CEO Adam Foroughi said (emphasis mine):
Early data has exceeded our expectations, with the advertisers in the pilot seeing substantial returns, often surpassing those from other media channels, and in many cases, experiencing nearly a 100% incrementality from our traffic. We're increasingly confident this vertical will scale significantly in 2025 and become a strong contributor for us over the next year and beyond.
Given the strong growth within its core business and the potential to successfully expand into ancillary markets, AppLovin clearly has a long runway ahead.
Analysts are still bullish on AppLovin
Wall Street is notorious for its diverse opinions, so it's noteworthy that the majority of analysts who cover AppLovin believe the stock has further to run. Of the 25 analysts who offered an opinion (thus far) in December, 76% have issued a buy or strong buy rating on the stock, and none recommend selling.
The recent run has pushed the stock price above the average price target, so there are some concerns that the stock has run too far, too fast. However, Wall Street is working to rectify that. AppLovin stock has received 16 price-target increases in the month since it reported its blockbuster results.
Oppenheimer analyst Martin Yang is the company's biggest cheerleader, recently increasing his price target to $480, which represents potential upside of 40%, compared to Tuesday's closing price. Beyond the beat-and-raise quarter, its recent foray into e-commerce advertising is bearing fruit. The analyst estimates that AppLovin's return on ad spending (ROAS) is comparable with industry leaders, including Meta Platforms, putting the app specialist in rarified company.
The one wrench in the works is the stock's frothy valuation. AppLovin is currently selling for 104 times earnings, but that fails to take into account the company's rapid and accelerating growth. However, its price/earnings-to-growth ratio (PEG), which factors in its growth rate, comes in at 0.10, when any number less than 1 is indicative of an undervalued stock.
Furthermore, since AppLovin went public in April 2021, it has outperformed the broader market by a wide margin, generating gains of 426%, eight times the 53% return of the Nasdaq-100. Given the company's execution, expanding addressable market, and long track record of growth, I'd argue that AppLovin is a buy.
