$AppLovin Corporation(APP)$ announced its fiscal Q1 2025 earnings yesterday (07 May 7 2025) delivering results that largely surpassed analyst expectations and showcased significant growth in its core advertising business. The company also announced a strategic sale of its mobile gaming division.
APP shares was up 13.37% after hours, and at time of this writing APP was up 15.50%.
AppLovin Q1 2025 Financial Highlights (ended 31 March 2025)
Revenue: AppLovin reported total revenue of approximately $1.48 billion, a significant increase of about 40% year-over-year (YoY) from $1.06 billion in Q1 2024. This figure beat consensus estimates, which were around $1.38 billion.
Earnings Per Share (EPS): The company posted a strong EPS of $1.67. This was a substantial beat compared to analyst estimates, which ranged from $1.43 to $1.45, and a significant increase from $0.67 per share in the same quarter of the previous year.
Net Income: Net income for the quarter reached $576 million (or $576.42 million according to some sources), a notable 144% increase from $236.18 million in Q1 2024. This translated to a net margin of 39%.
Adjusted EBITDA: Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) was $1.005 billion (or $1 billion by some reports), up 83% YoY from $548.77 million. The adjusted EBITDA margin stood at an impressive 68%.
Advertising Revenue Growth: The Software Platform (primarily advertising) revenue was the main driver of growth, surging 71% YoY to $1.16 billion. Adjusted EBITDA for this segment climbed 92% YoY to $943 million, boasting an 81% margin. This growth was attributed to AI advancements (like AXON technology), model enhancements, and increased adoption by advertisers.
Apps Revenue: In contrast, Apps revenue (which includes their mobile gaming studios) saw a decline of about 14% YoY to $325 million. However, segment-adjusted EBITDA for Apps still grew by 9% YoY to $61.8 million, with a 19% margin.
Free Cash Flow: The company generated a robust $826 million in free cash flow, an increase of 113% YoY.
Share Repurchases: AppLovin repurchased 3.4 million shares of its Class A common stock for a total cost of $1.2 billion during the first quarter.
Strategic Development - Sale Of Mobile Gaming Business
Sale of Mobile Gaming Business: AppLovin announced a definitive agreement to sell its mobile game business to Tripledot Studios for $400 million in cash, while retaining an approximately 20% ownership stake in Tripledot. This transaction is expected to close in the second quarter of 2025 and signals a strategic shift to focus more intensely on its high-margin advertising technology platform.
Stock Reaction and Future Guidance
Following the earnings announcement, AppLovin's stock (APP) experienced a significant surge of approximately 13% to 15% in after-hours trading on 07 May 2025, with the price reaching around $343.
If we looked at how APP have traded after its past earnings, there is a possibility of a trading downside after rising for a period, currently it is able the 50-day period and the bulls should have regained the control after the more than 13% surge post earnings, whether the bulls can keep up the daily uptrend continuation, would depend if RSI should an improving momentum.
Future Guidance
Q2 2025 Guidance: AppLovin anticipates Total Advertising Revenue to be between $1.195 billion and $1.215 billion. This guidance was noted by some sources as being above analyst consensus estimates of around $1.11 billion for the segment.
Total Advertising Adjusted EBITDA is projected to be between $970 million and $990 million, with an expected margin of 81%. One source mentioned that the overall Q2 guidance might have trailed broader analyst expectations for total revenue, potentially due to the sale of the gaming division.
Valuation Analysis
If we looked at the forward price to earnings for APP, which is 58.54, and at the last current price of $350, this looks like a good deal, because if we normalize that with the PEG ratio, we are looking at a PEG of 1.38.
Though we would think not think that APP is expensive nor cheap as anything under one is considered cheap, but the PEG of 1.38 sits between one and two which mean it is ok, but we need to understand that APP is growing the EPS quite fast, and we need to understand the law of large number and once EPS revenue growth rate hit a certain number, it will decline, but I think we can take 39% for the time being.
Usually we need to look at tech companies terminal price to sales which is generally between 10 and 12, and is considered the top end. Currently, APP is at 18.2 which means that it is already very high but do understand that APP is growing quite a lot, if we projected to 2025 which revenue is estimated to come in at $8 billion, and we put price to sales for APP for the average on the high side for tech companies at 12, we will be getting a forward market cap of roughly 96 billion.
Then this would reflect to be lower than the current share price right now, but if we think that the market allow APP to trade continuously at 18 or 20 forward price to sales, and we take the same 8 billion revenue, with a price to sale at 18, we will be looking at a $144 billion market cap, this would give us a 40% upside from the current price.
So these are all assumptions, and we need to question ourselves what is the likelihood that the market would allow APP to trade rich, so we might need to wait and see because 350 level is not considered cheap in that case.
If you are an investors who see potential in APP, one can consider to load APP at 350, for me, I would most probably load APP at around $300.
Analyst Sentiment and Price Targets (as of early May 2025)
Overall Sentiment: Analysts generally maintain a bullish outlook on AppLovin. The consensus rating is often cited as a "Buy." Reports indicate a significant majority of analysts rate the stock as a "Strong Buy" or "Buy," with a smaller portion suggesting "Hold."
Price Targets: Analyst price targets for APP show a wide range, with some estimates reaching as high as $650 to $682.50 on the higher end, and lows around $200 to $202. The average one-year price target reported varies by source, with one suggesting around $482.30 and another, possibly older or using a different set of analysts, around $297.73.
Zacks Rank: Prior to the earnings release, Zacks Investment Research had a #3 (Hold) rating on the stock, noting a mixed trend in estimate revisions.
Company Focus: Analysts highlight AppLovin's strategic focus on its AI-driven advertising technology (Axon) and its expansion into web advertising as key growth drivers. The sale of the gaming studios is seen as a positive step to concentrate on the more profitable ad-tech business.
Is AppLovin (APP) a Buy?
AppLovin's Q1 2025 earnings report demonstrated strong financial health, significant outperformance in its core advertising segment, and robust profitability. The strategic sale of its gaming business to focus on the higher-margin ad-tech platform has been positively received. The company's AI-driven ad solutions appear to be yielding substantial growth.
Many analysts hold a positive view of the stock, as reflected in "Buy" ratings and optimistic price targets. The strong guidance for its advertising segment in Q2 further supports this positive outlook.
However, potential considerations include:
Market Volatility: The stock has a history of significant price movements (beta of 2.39).
Competition: The ad-tech space is competitive.
Economic Factors: Broader economic uncertainties could impact advertising budgets.
Integration & Expansion Risks: Challenges in expanding web advertising, particularly internationally, and maintaining the current growth momentum.
Past Scrutiny: The company has previously faced and addressed short-seller allegations.
Summary
Based on the strong Q1 2025 earnings, robust growth in the advertising segment, strategic focusing, and generally positive analyst sentiment, AppLovin (APP) presents a compelling case for investors. The company appears well-positioned to capitalize on the growth in mobile and web advertising.
I would be monitoring this stock if it can hit my preferred target price at around $300.
Appreciate if you could share your thoughts in the comment section whether you think APP could continue to exhibit strong EPS growth and by projection, it could be growing at higher price to sales .
@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.
Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.
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