Why AppLovin’s stock is up nearly 21% in the past month

App Monetization Company Stock Prices AppLovin (APP 0.90%) rose 20.5% in August, according to data from S&P Global Market Intelligence. The company reported financial results for the second quarter of 2024 on August 7, showing both impressive growth and robust profit margins.

AppLovin builds its own apps and also has software to help other companies monetize their apps. As for this software, the company released a new version last year that is powered by artificial intelligence (AI). It was a resounding success, fueling impressive growth. Software revenue in Q2 was up 75% year-over-year, increasing total revenue 44%.

The AppLovin software platform is very high margin and raises the bottom line for the entire business. In Q2, the company reported net income of $310 million and free cash flow of $446 million. Not only have both figures more than doubled from last year, but they also represent impressive margins of 29% and 41%, respectively.

Investors are hard-pressed to find a business that can grow as fast as AppLovin while still having such high profit margins. And that’s why the stock continued to rise in August.

Is there reason to worry about AppLovin?

For the upcoming third quarter, AppLovin’s management expects to grow revenue by approximately 30% year-over-year. This is a big drop from its 44% growth in Q2. But investors should note that it’s already past the anniversary of its new software and, as a result, no longer has that unique momentum. Seeing a 30% increase more than a year after making the improvements is still impressive.

That said, an interesting issue with AppLovin’s finances is that its cash flow is declining, even though it generates a lot of free cash flow. The company has reduced its share count, which is good. But its debt has grown modestly over the past two years and its cash has dwindled.

APP Cash and Short Term Investment Data (Quarterly) by YCharts

At $3.5 billion, AppLovin’s long-term debt is substantial, and management will need to address it in the coming years. Moreover, it pays sizable stock-based compensation, which would dilute shareholder value if management didn’t buy back so many shares. Not necessarily a problem, but the debt and stock-based compensation explains why there isn’t as much cash left as one might expect.

What should investors do now?

I think AppLovin remains a top business — any company that can profitably grow its top line by more than 30% is worth watching. My concern today is that the stock has doubled so far in 2024 and about half of the gain is because the valuation has become more expensive.

Ratings may fluctuate. So, the valuation could pull back with AppLovin’s stock. So I wouldn’t necessarily be surprised if he underperformed for a season. But zooming in even further, this company is doing some impressive things in the app economy and is worth keeping an eye on, especially if it can maintain its impressive profit margins.