AI And AXON Advancements Will Revolutionize Mobile Gaming And E-commerce Advertising

Key Takeaways

• Investment in AI technologies and AXON algorithm advancements are expected to drive significant future revenue from mobile gaming advertisers.
  
• New e-commerce initiatives and diversified advertiser verticals aim to substantially grow and sustain revenue beyond traditional mobile gaming markets.
  
• AppLovin's advancements in AI technology and strategic e-commerce expansion, alongside strong financial metrics and proactive investments, position it for significant growth and shareholder value enhancement.

Catalysts

Engages in building a software-based platform for advertisers to enhance the marketing and monetization of their content in the United States and internationally.

• AppLovin is prioritizing significant technological advancements in its AXON algorithm and AI software development, which are expected to drive substantial future growth in revenue from mobile gaming advertisers.
  
• The company is undertaking a new e-commerce initiative that has shown promising pilot results and is projected to significantly contribute to revenue growth starting in 2025.
  
• A planned expansion of data center capacity and a focus on AI research suggest a commitment to supporting future growth, which could enhance earnings by optimizing operations and scaling efficiently.
  
• AppLovin's increase in share repurchase authorization aims to manage share dilution and improve shareholder value, potentially impacting EPS positively over the long term.
  
• The focus on expanding to new advertiser verticals, like e-commerce, and potential future expansion of supply beyond mobile games could diversify revenue streams and contribute to sustained revenue growth.

AppLovin Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AppLovin's revenue will grow by 22.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.8% today to 47.9% in 3 years time.
• Analysts expect earnings to reach $3.8 billion (and earnings per share of $11.21) by about December 2027, up from $1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.1x on those 2027 earnings, down from 98.7x today. This future PE is lower than the current PE for the US Software industry at 43.0x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.01%, as per the Simply Wall St company report.

AppLovin Future Earnings Per Share Growth

Risks

• AppLovin's expected ongoing research advancements and improvements in AI technology, particularly in the AXON algorithm, could drive higher-than-anticipated growth and continue to enhance the company's core software platform, positively impacting revenue and earnings.
  
• The company's foray into e-commerce presents a new growth opportunity, with early data from the pilot program showing substantial returns and high incrementality. If successful, this could significantly contribute to revenue and earnings as the vertical scales.
  
• AppLovin has demonstrated strong financial metrics, including a 39% increase in revenue, a 72% increase in adjusted EBITDA, and significant free cash flow growth, suggesting a robust financial foundation that could support continued profitability and efficiency.
  
• The company's proactive approach to infrastructure investments, such as renewing the Google Cloud contract ahead of schedule, ensures it has the capacity to support future growth, potentially maintaining or improving net margins as operations scale.
  
• AppLovin's strategic capital allocation, including share repurchases and maintaining a low net debt leverage ratio, could enhance shareholder value and provide financial flexibility, which may positively affect the company's earnings and market valuation.

Valuation

• The analysts have a consensus price target of $322.06 for AppLovin based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $480.0, and the most bearish reporting a price target of just $105.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.9 billion, earnings will come to $3.8 billion, and it would be trading on a PE ratio of 35.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of $338.21, the analyst's price target of $322.06 is 5.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.