AppLovin (NASDAQ:APP) Surprises With Strong Q2, Stock Jumps 20.7%

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.

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"Our steady focus on execution, investment in our team, and the ongoing enhancement of our core technologies are driving consistent growth and opening new opportunities for expansion. As we look to the future, our strategy continues to center on improving our core technology, and expanding our Connected-TV (Wurl) and OEM & Carrier (Array) initiatives. These steps are essential to our plan for delivering long-term shareholder value," said CEO Adam Foroughi.

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.

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.

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.

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.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Profitability

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.

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.

Key Takeaways from AppLovin's Q2 Results

With a market capitalization of $10.5 billion, a $876.2 million cash balance, and positive free cash flow over the last 12 months, we're confident that AppLovin has the resources needed to pursue a high-growth business strategy.

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.

AppLovin may have had a good quarter, but does that mean you should invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.