AppLovin's stock surges more than 20% after analysts say AI tools are paying off

By Wallace Witkowski

App-monetization company's stock is up more than 250% year to date

AppLovin Corp. shares have made it a recent habit of surging after earnings, and Thursday's move was no exception as analysts applauded a successful rollout of the app-monetization company's artificial-intelligence-based ad-targeting engine.

Shares of AppLovin (APP) rocketed more than 32% to an intraday high of $38.96, after the company posted a big earnings beat on the back of the rollout of its AI-based Axon 2.0 engine That put shares in the neighborhood of their best day ever, May 12, 2022, when shares closed up 34.7%, although the stock had pulled back somewhat Thursday and was recently up about 24%.

The current rally is more in the neighborhood of what AppLovin's stock notched after its prior two earnings reports, which highlighted signs of improvement in the mobile-ad market, and it puts the stock on track for its largest single-day percentage gain since Feb. 9, 2023, the session following the first of those two earlier reports.

Meanwhile, shares of game engine and app-monetization company Unity Software Inc. (U) slipped 1% Thursday. Earlier in the month, Unity hiked its annual forecast after posting a narrower-than-expected loss.

Goldman Sachs analyst Eric Sheridan, who has a buy rating on AppLovin's stock, doubled his price target to $50 from $25 based on the rollout of Axon 2.0 and its reception.

"While we expect the short-term investor debates to stay focused on the volatility in the advertising/gaming end markets, we continue to look long-term at the collection of businesses under AppLovin as producing above-average industry growth and a strong margin profile in a recovered mobile ads/mobile gaming landscape," Sheridan said.

UBS analyst John Hodulik, who has a neutral rating, also doubled his price target to $40 from $20, cheering the faster-than-expected "reacceleration" of the software business.

"We continue to see substantial operating leverage for the overall business as software scales and its revenue contribution increases (now 54% of the business vs.40% a yr ago)," Hodulik noted.

D.A. Davidson analyst Franco Granda, who has a buy rating and raised his price target to $40 from $32, said AppLovin's results and outlook "easily surpassed expectations" for Axon 2.0.

"These gains should attract increased ad spend to the platform, accelerating top line growth, independent of a market recovery," Granda said. "In mobile advertising, it is all about performance -- the significance of efficiency gains. When an ad network enhances its recommendation/matching models, customers are able to achieve enhanced return on ad spend (ROAS) in the form of increased conversions or higher revenues from in-app advertising (IAA) or in-app purchases (IAP), etc."

He continued: "Broadly speaking, as customers achieve higher ROAS, they are more likely to increase their ad budgets and direct the spend towards the highest performing networks. This influx of spending not only boosts the revenues of the ad network but also broadens the range of advertisers on the platform. Additionally, as the model processes more data, its AI-driven recommendations become increasingly refined, achieving further improvements in ad performance over time."

JPMorgan analyst David Karnovsky, who has a neutral rating on the shares, raised his price target to $36 from $21 given Axon 2.0's performance and "easing concern" over potential changes to Apple Inc.'s (AAPL) iOS or Alphabet Inc.'s (GOOGL) Android platform.

"On that topic, management stated they did not expect any material adjustments over the next 6-12 months that could impact their execution, a sentiment we've heard from some mobile game publishers," Karnovsky said. "While we're increasingly partial to that view, we do think this will remain a headline risk over the medium-term, and a likely headwind to further multiple gains, especially after a significant run-up in the stock over the prior few months."

Year to date, AppLovin shares have soared more than 250%, while Unity shares have gained 30%, compared with a 17% gain in the S&P 500 SPX and a 32% rise in the Nasdaq Composite COMP.

Even with all those gains, AppLovin shares are still trading lower than they were at this time last year. The stock's price is 9% off its close of $40.46 on Aug. 10, 2022. In comparison, Unity shares are 33% off a year ago, when they closed at $55.57, while there has been a 6% gain on the S&P 500 and a 6.5% gain on the Nasdaq.

Wedbushanalyst Nick McKay, who has an outperform rating on the stock, raised his price target to $48 from $37, noting that Axon 2.0 "has enabled more ad spend efficiency for customers (as promised), primarily mobile game developers for the time being, through enhanced targeting of transaction-based customers."

"This is reflected by higher revenue per installation, which increased by 38% in the quarter," McKay said, expecting the first full quarter of Axon 2.0 to put the company's guidance "well within reach."

Of the 23 analysts who cover AppLovin, 14 have buy-grade ratings, eight have holds and one has a sell rating, with an average price target of $34.45, according to FactSet data. At least seven analysts hiked price targets following earnings.

-Wallace Witkowski

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08-10-23 1418ET

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