Solid Financial Results Clearing Doubts
AppLovin’s 2023 earnings results were impressive, particularly in the fourth quarter. Total revenue reached $3.3 billion, a 17% increase year-over-year (YoY). This growth was driven by the Software Platform Segment, which saw an impressive 88% YoY growth in revenue in Q4.
The adjusted EBITDA margin was a strong 46%, resulting in an adjusted EBITDA of $1.5 billion. This EBITDA was largely converted into free cash flow, reaching $1 billion, indicating the company’s strong operating dynamics.
Powerhouse Over Competition
AppLovin’s performance has been exceptional compared to its competitors in the AdTech industry. Figure 2 shows that AppLovin has grown by nearly 300% in a year, far outpacing the performance of The Trade Desk and Innovid.
Valuation
Using a discounted cash flow (DCF) methodology, I estimate AppLovin’s fair value to be $131.5 per share, representing a 97% premium over its current stock price. This valuation is based on assumptions about revenue growth, adjusted EBITDA margin, tax savings, and investment in net working capital and CAPEX.
Risks
While AppLovin’s fundamentals are strong, it faces potential risks from competition with The Trade Desk and the management of its two segments. These risks could impact revenue and margins if not effectively addressed.
Conclusion
Given AppLovin’s strong growth, profitability, and competitive position, I have upgraded my recommendation from hold to a strong buy. The company’s fundamentals and attractive valuation suggest that the current stock price presents a favorable risk-return opportunity.
