AppLovin (NASDAQ:APP) Q1: Strong Sales, Stock Soars

Full Report / May 10, 2023
Add to Watchlist

Mobile app advertising platform AppLovin (NASDAQ: APP) reported Q1 FY2023 results that beat analyst expectations, with revenue up 14.4% year on year to $715.4 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $720 million at the midpoint, 3.15% above what analysts were expecting. AppLovin made a GAAP loss of $4.52 million, improving on its loss of $115.3 million, in the same quarter last year.

AppLovin (APP) Q1 FY2023 Highlights:

  • Revenue: $715.4 million vs analyst estimates of $694 million (3.08% beat)
  • EPS: -$0.01 vs analyst estimates of $0.06 (-$0.07 miss)
  • Revenue guidance for Q2 2023 is $720 million at the midpoint, above analyst estimates of $698 million
  • Free cash flow of $286.5 million, up 75.6% from previous quarter
  • Gross Margin (GAAP): 63.4%, up from 54.9% same quarter last year

Co-founded by Adam Foroughi who was frustrated with not being able to find a good solution to market his own dating app, AppLovin (NASDAQ:APP) is a provider of marketing and monetization tools for mobile app developers and also operates a portfolio of mobile games.

AppLovin combines a mobile ad network, developer tools, and a portfolio of hundreds of free to play mobile games it has assembled through acquisitions and partnerships with game studios.

Today’s app developer journey has three key steps – make, market, and monetize. The ‘make’ step has never been easier, but developers still face key challenges in marketing and monetizing their apps. Because of the ease of creation, there are millions of apps on Apple and Google’s appstores, which creates discovery and marketing challenge for mobile app developers. A further issue is even after a user downloads an app, developers must compete for user engagement and screen time. Most mobile games rely on in-app purchases (IAPs) and in-game advertising for monetization, which present hurdles on how to price IAPs appropriately while navigating the mobile ad ecosystem is difficult for individual developers.

AppLovin solves for these issues through its unique business model. Originally a provider of marketing tools for mobile game developers, AppLovin altered its strategy in 2018 and began acquiring and partnering with game studios to launch its own mobile gaming apps. The data and insights generated from the hundreds of in-house mobile gaming apps generated a virtuous cycle which improved its marketing software’s pricing and advertising recommendations for its customers, enabling developers to improve their discovery, monetization, and engagement.

The digital advertising market is large, growing and becoming more diverse, both in terms of audiences and media. This as a result drives a growing need for a software that enables advertisers to use data to automate and optimize ad placements.

AppLovin’s competitors can be broken into two groups: mobile game developers and mobile ad networks. On the gaming side, rivals include Zynga (NASDAQ:ZNGA), Playtika (NASDAQ: PLTK), and Roblox (NYSE: RBLX). Competitors in its ad network business are The Trade Desk (NASDAQ: TTD) and Unity Software (NYSE:U).

Sales Growth

As you can see below, AppLovin's revenue growth has been strong over the last two years, growing from quarterly revenue of $603.9 million in Q1 FY2021, to $715.4 million.

AppLovin Total Revenue

This quarter, AppLovin's quarterly revenue was once again up 14.4% year on year. On top of that, revenue increased $13.1 million quarter on quarter, a strong improvement on the $10.8 million decrease in Q4 2022, and a sign of re-acceleration of growth, which is very nice to see indeed.

AppLovin is guiding for revenue to decline next quarter 7.24% year on year to $720 million, a further deceleration on the 16.1% year-over-year decrease in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 0.55% over the next twelve months.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. AppLovin's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 63.4% in Q1.

AppLovin Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.63 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. AppLovin's free cash flow came in at $286.5 million in Q1, turning positive year on year.

AppLovin Free Cash Flow

AppLovin has generated $730.6 million in free cash flow over the last twelve months, an impressive 25.1% of revenues. This extremely high FCF margin is a result of AppLovin asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from AppLovin's Q1 Results

With a market capitalization of $6.43 billion AppLovin is among smaller companies, but its more than $1.25 billion in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were very impressed by the strong improvements in AppLovin’s gross margin this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations, even though it still points to a decline in revenue in absolute numbers. Overall, we think this was a good quarter. The company is up 9.78% on the results and currently trades at $19.54 per share.

Is Now The Time?

When considering AppLovin, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of AppLovin we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.

AppLovin's price to sales ratio based on the next twelve months is 2.3x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds from the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.