1 Top AI Stock (Not Nvidia) That's Up Over 250% in a Year -- Why It Might Still Be A Buy | The Motley Fool (2024)

After toying for years with various digital advertising software stocks, I've finally landed on one I think is a winner: AppLovin (APP -1.95%). Nvidia may have (quite rightfully) captured the spotlight on Wall Street and catapulted itself into a spot among the largest companies in the world, but the GPU maker isn't the only business winning from the artificial intelligence (AI) race.

Unlike some of the other businesses that like to flaunt their AI credentials, AppLovin has been delivering some incredible financial results. If it can keep the pedal to the metal, the more than 250% rally its stock enjoyed over the past year might be just the beginning.

Doing AI right in 2024

AppLovin provides an AI-powered digital ad platform for app publishers that targets potential users in hopes of convincing them to download their apps. Its latest iteration, which it launched in early 2023, is called Axon 2.0.

Suffice it to say the AI algorithms in Axon 2.0 are on fire. Revenue from AppLovin's "software platform" segment, which houses the AI ad platform, soared by 91% year over year in Q1 2024 to $678 million. That contributed to a total revenue increase of 48% to $1.06 billion.

The other $380 million in sales came from its "apps" segment (up only 5% year over year), a collection of mobile game studios and developers. AppLovin's game studios are among Axon 2.0's customers, and why not, given the ad platform's success?

So what exactly makes Axon 2.0 AI so good at landing app downloads for mobile marketers? It's a mystery to the outside world. The algorithms of digital ad platforms are often referred to as "black boxes." The inner workings of their ad placement software are intentionally kept secret to prevent them from being copied by rivals in the fiercely competitive industry.

The methodologies of Axon 2.0 are similarly tightly held secrets, but clearly, marketers don't care. If using AppLovin's services means more mobile users are hitting the download button, and they are getting good return on investment from their ad campaigns, they're happy to keep shoveling portions of their ad budgets toward it.

Is this story more than a short-term bump?

There's always the risk that the wild marketing and ad landscape could shift: Some peer could come up with a better AI-powered black box, and AppLovin might lose its mojo.

But the other reason the stock has rocketed higher in the last year is the company's profitability. AppLovin has gone from paltry profit generator to cash-gushing machine. And management (which includes co-founder Adam Foroughi as CEO) has been using much of that cash for stock buybacks. It repurchased another $752 million worth of stock (about 2.7% of the total market cap) in the first quarter alone.

Data by YCharts.

AppLovin is also making investments to help ensure it has a steady flow of users. In April, it invested $50 million in an app-based e-commerce and ad marketplace start-up called Flip, landing a new user for Axon 2.0 in the process. Perhaps similar investments can attract more customers to Axon 2.0 and keep the party rolling. There's no telling how long AppLovin's wild run will last.

I've had a position in demand-side digital ad sales platform operator The Trade Deskfor years, but that stock has been moving sideways for some time due to its elevated valuation.

AppLovin trades at a premium too -- 50 times its trailing 12-month earnings. But given management's outlook for continued growth, the stock only trades for 16 times expected 2024 earnings. That relatively low sticker price is in part due to its not-so-great balance sheet, as management has been peeling off cash to make those stock repurchases in recent quarters. At the end of March, AppLovin had just $436 million in cash and equivalents on the books, but $3.49 billion in long-term debt.

I recently opened a position in AppLovin as it seems to be assuaging investors' clamor for more profits, and fast. The Trade Desk is still my top holding in digital ad software, and I'll continue to hold both stocks, but I'll certainly be watching to see how the AI story at AppLovin plays out this year.