AppLovin (NASDAQ:APP) Q2: Strong Sales, Stock Jumps 21.7%

Full Report / August 09, 2023

Mobile app advertising platform AppLovin (NASDAQ: APP) reported Q2 FY2023 results exceeding Wall Street analysts' expectations, with revenue down 3.36% year on year to $750.2 million. On top of that, next quarter's revenue guidance ($790 million at the midpoint) was surprisingly good and 6.51% above what analysts were expecting. AppLovin made a GAAP profit of $80.4 million, improving from its loss of $21.8 million in the same quarter last year.

AppLovin (APP) Q2 FY2023 Highlights:

  • Revenue: $750.2 million vs analyst estimates of $724.3 million (3.57% beat)
  • EPS: $0.22 vs analyst estimates of $0.07 ($0.15 beat)
  • Revenue Guidance for Q3 2023 is $790 million at the midpoint, above analyst estimates of $741.7 million
  • Free Cash Flow of $223.7 million, down 21.9% from the previous quarter
  • Gross Margin (GAAP): 65.5%, up from 60.8% in the 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 mediocre over the last two years, growing from $668.8 million in Q2 FY2021 to $750.2 million this quarter.

AppLovin Total Revenue

This quarter, AppLovin's revenue was down 3.36% year on year, which might disappointment some shareholders.

Next quarter's guidance suggests that AppLovin is expecting revenue to grow 10.8% year on year to $790 million, improving on the 1.91% year-on-year decline it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 8.29% over the next 12 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 65.5% in Q2.

AppLovin Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.66 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, AppLovin's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. AppLovin's free cash flow came in at $223.7 million in Q2, up 110% year on year.

AppLovin Free Cash Flow

AppLovin has generated $847.6 million in free cash flow over the last 12 months, an eye-popping 29.4% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from AppLovin's Q2 Results

Sporting a market capitalization of $10.5 billion, more than $876.2 million in cash on hand, and positive free cash flow over the last 12 months, we believe that AppLovin is attractively positioned to invest in growth.

We were impressed by AppLovin's revenue and EBITDA beats this quarter, driven by the successful roll-out of its new AI-based advertising engine, AXON 2.0. We were also glad its revenue and EBITDA guidance for next quarter blew past analysts' expectations. Zooming out, we think this was an impressive quarter that should delight shareholders. The stock is up 21.7% after reporting and currently trades at $35.78 per share.

Is Now The Time?

When considering an investment in AppLovin, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of AppLovin, we'll be cheering from the sidelines. Its revenue growth has been weak, and analysts believe that growth rate will remain steady. And while its bountiful generation of free cash flow empowers it to invest in growth initiatives, the downside is that its customer acquisition is less efficient than many comparable companies and 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 12 months is 3.5x, 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.

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