What digital-time-killing-game do you have to check in on everyday? Words With Friends? Wordle? Final Fantasy? Angry Birds? (Do people still play Angry Birds??)

Whatever it is, you can bet there’s a good chance you regularly play, or have played, an online game who’s creators are being paid through their relationship with AppLovin (APP - Get Rating). Applovin gives game developers the tools they need to monetize their creations along with the ability to optimize that monetization. 

AppLovin has three main lines of business. First they sell advertising to businesses that can advertise in their games. Yes, it’s those annoying “you’ve got to look at this advertisement to get to the next level/game” ads. But those ads are not only profitable, they are also highly targeted, which leads to AppLovin’s second business…analytics.

Through its app network, which includes both games AppLovin makes through investments in digital game companies, as well as games from a wide variety of non-AppLovin studios, AppLovin gets access to a treasure trove of user data.

This user data is then processed through AppLovin’s machine learning software platform, and provides businesses with information on customers they want to target for ads…as well as helping them optimize who sees what ads when. 

AppLovin charges businesses for this data and the ability to analyze it in detail, which lets them then manage and direct advertising spend. The system is very sophisticated, and an advertiser can manage all aspects of an ad campaign through the APP software. 

And third, AppLovin takes a cut of all revenue processed through games using the APP platforms, which it dubs its consumer business. So, every time you purchase diamonds from the in-game vendor so your character can wear a red shirt instead of a boring brown one, AppLovin makes money as well. 

Just over 40% of APP’s revenue comes from in-game purchases. Revenue from the mobile gaming market is currently projected to grow at a compound annual growth rate (CAGR) of right around 7.5% between now and 2027.

And AppLovin has been putting up the numbers to show they are taking advantage of the current and future growth. In its latest quarterly earnings report, APP put up 21% quarterly revenue gains YoY increasing revenue to $864 million in the quarter. As Adam Foroughi, CEO and Co-Founder of AppLovin, stated, “We are thrilled to announce our best quarter ever leading to very strong financial results.”

Not only is the company growing earnings, adjusted EBITDA was up 63% in the quarter, but margins are growing as well. AppLovin’s latest gross margins come in at over 56%. 

As AppLovin’s software platform, which helps businesses serve up ads, has improved, the company has seen a major jump in business revenue, the first and second categories I described above. Business, advertising and analytic revenue, jumped 65% in the latest quarter YoY.

The improving software should have a synergistic effect with AppLovin’s consumer business, as the software delivers the most relevant ads to customers willing to spend money through the apps. Throw in the growing use of AI in digital gaming, to enhance the user experience and have gamers spending even more time and money on the games they play, and AppLovin has a nice tailwind pushing the stock forward. 

AppLovin rates an overall A in our POWR Ratings, but as the story above should illustrate, it is most highly ranked in the Growth component, where it stands above 99.75% of the stocks we track. APP also ranks highly in the Quality component with an over 86% ranking.

AppLovin operates in a growing niche sector, the stock only came public in 2021, but it is a niche that is taking advantage of the growing amount of time we all spend on our digital devices. APP optimizes monetization for companies offering an escape from the real world, and it’s hard to argue that isn’t a growing part of the digital ecosystem.

The company should continue to perform well as its product, advertising and analytics, and the product of the developers it supports, continues to get better and better. 

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APP shares were trading at $39.00 per share on Tuesday afternoon, down $0.50 (-1.27%). Year-to-date, APP has gained 270.37%, versus a 19.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Steven Adams

After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA. More...

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