AppLovin’s AI Potential: Can the Momentum Continue?

Key Points

• AppLovin stock is trending lower after ending 2024 with a bullish surge.  
• The company is expanding its AI-based software platform to include e-commerce companies, which could help justify the stock’s lofty valuation.
• Analysts remain mixed on APP stock, but several analysts have raised their price targets in the past month.  

AppLovin Corp. NASDAQ: APPstock jumped 166% after a strong earnings report in November. That made APP stock the top performer among stocks in the NASDAQ 100 in 2024. But after that spectacular surge to close out 2024, the stock is down nearly 4% in the last month, as short interest jumped over 3%. 

Analysts have mixed opinions on the stock. Questions are arising over concerns that the company’s revenue and earnings growth will start to slow in the next several quarters. And with expectations of tough comparisons to 2024, you can understand why some investors are looking to take some money off the table.

However, AppLovin is part of the still-emerging AI story, which is still in its early stages. That’s why risk-tolerant investors should carefully weigh the risk and reward for APP stock heading into 2025.

Adding AI to the Programmatic Advertising Space

AppLovin is one of many business services stocks in AI 2.0. This group of companies is expected to show how AI can be monetized to help corporations return on the massive investment they’ve made in AI infrastructure.

According to the company, AppLovin “provides end-to-end software and AI solutions for businesses to reach, monetize, and grow their global audiences.” Specifically, AppLovin offers a software-based platform rooted in AI that advertisers can use to provide more targeted advertising for their content. 

Programmatic advertising isn’t new. It’s been the holy grail for advertisers in one way or another for about 30 years. Ever since advertisers had tools that let them get objective data on their ads, they’ve been looking for ways to target their consumers as closely as possible.

That's what AI and a company like AppLovin are providing. And unlike companies such as The Trade Desk Inc. NASDAQ: TTD, AppLovin is focusing its services on video game apps through Axon-2, its AI-powered ad tech tool. Axon-2 uses predictive machine learning that gets better at targeting gamers the more it’s used. And the more targeted results it provides, the more demand it creates.

The E-Commerce Channel Is a Potential Growth Opportunity

AppLovin’s revenue is up 43% through the first three quarters of 2024. That kind of explosive growth will be hard to maintain, and analysts see the company’s revenue and earnings growth slowing in 2025. If that happens, the stock could be set for a sharp downturn.

However, AppLovin is piloting an invite-only e-commerce advertising program. The program, which will focus on direct sales and product promotions, is a logical extension of AppLovin’s capabilities of taking machine learning to serve up ads to targeted markets.

If the company can successfully establish itself in this new vertical, it would go a long way towards convincing investors that it can justify its valuation, which is 81x forward earnings and a price-to-sales ratio of 25x as of January 9, 2025.

Will 2025 Be the Year for APP Stock’s Breakout?

As mentioned above, analysts have mixed opinions on APP stock in 2025. The consensus price target of $312.18 suggests the stock is overvalued by about 5%. However, that’s not consistent with recent analyst opinions, including that of Jefferies, which reiterated its Buy rating on January 8, 2025, and raised its price target on APP stock from $400 to $425.

Outside of revenue and earnings growth, APP stock is likely to get a boost if it becomes part of the S&P 500. One reason for the surge in APP stock after its earnings report in November was the expectation that the company would be included in the S&P 500 in December. That didn’t happen, which could be one reason the stock sold off, as investors realized that institutional investments may not come in as strongly as expected. Still, in the last three quarters, institutional buying has outpaced selling by about a 2-to-1 ratio.

However, investors and analysts still expect APP stock to become part of the index sometime in 2025. When that occurs, it could provide a bullish lift for APP stock similar to that received by Palantir Technologies Inc. NASDAQ: PLTRin 2024.