Key Points

AppLovin delivers consistent strong growth while improving its margins.
The company stands to gain significantly from launching its self-serve platform to the public next month.

Beyond infrastructure sectors, AppLovin (NASDAQ: APP) ranks among the top artificial intelligence (AI) success stories in advertising technology. Its Axon 2.0 engine, rolled out in 2023, has fueled remarkable expansion, and recent first-quarter results announced after market close on May 6 show this momentum continuing unabated.

Even with solid operational results, the stock has declined about 25% year to date. That said, it has risen 40% over the last year and more than 750% across the past five years.

Let's dive into the Q1 performance and future outlook to assess whether the shares represent a compelling buy.

Robust Growth Persists

A standout feature of AppLovin's progress since Axon 2.0's debut has been its dual impact: accelerating revenue while widening margins. Q1 followed suit, with revenue jumping 59% to $1.84 billion. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins grew 400 basis points to 85%, and gross margins reached 89%, up from 86.8% the prior year.

These gains propelled profitability, as earnings per share (EPS) from continuing operations surged 70% to $3.56 from $2.10 a year earlier. Adjusted EBITDA rose 66% to $1.56 billion.

AppLovin also produced substantial cash flow, deploying it toward share repurchases. Free cash flow hit $1.3 billion in the quarter, funding the buyback of 2.2 million shares for $1 billion.

Further upside looms as the self-serve platform opens to the public in June, expanding beyond its prior closed system limited mostly to major gaming developers. This shift will attract smaller advertisers and non-gaming sectors, unlocking vast new markets.

The emerging consumer segment shows promise too, with 25% growth from January to March and record ad spend in April. AppLovin anticipates tailwinds from gaming developers adopting hybrid monetization - blending ads with in-app purchases - to bolster its core gaming operations.

For Q2, management guides revenue between $1.915 billion and $1.945 billion, implying 52% to 55% growth. Adjusted EBITDA is projected at $1.615 billion to $1.645 billion.

Time to Buy AppLovin Shares?

AppLovin exemplifies rare AI-driven transformation in its primary business, achieving over 50% revenue growth year after year, often while trimming operating costs - a feat few peers match.

Skeptics and short-seller reports have surfaced, yet the financials speak volumes. The upcoming self-serve platform could ignite even faster expansion.

On valuation, AppLovin trades at a forward price-to-earnings (P/E) ratio below 30 using 2026 analyst projections, yielding a price/earnings-to-growth (PEG) ratio of 0.5. PEGs under 1 typically signal undervaluation, especially for high-growth names that often exceed 1.

With attractive pricing and strong growth prospects, the stock appears a strong buy at present levels.

Geoffrey Seiler holds no position in the stocks discussed. The author maintains a disclosure policy.

Views expressed are those of the author and not necessarily those of Nasdaq, Inc.