While AppLovin Corp. (APP) is not as over-the-top powerful as SMCI and POWL's respective inflections, I would qualify APP's Beat n Raise as the 3rd best Top Tier Inflection of this earnings season.
AppLovin’s 2nd-generation AI software-platform, Axon 2.0, is killing it, fueling its Revenue and Earnings beats on many levels. First, revenue beat consensus by ~3% in Q4, marking the fourth consecutive pristine/stellar quarter for the company. Take a look:
Showcasing how the inflection is accelerating further in real time, AppLovin guided for Q1 Revenues around 5.5% over estimates.
APP's AI software biz is screaming, growing 88% YoY in Q4 to $576M. Take a look at the incredible growth:
These were the Street’s estimates coming into APP’s jaw-dropping guide-up for Q1:
Here is the guide up:
This brings us to the most explosive part of the Q4 report: the 80% drop-down in incremental EBITDA margin on the software-platform, leading to a nearly 40% beat on the EPS line:
The third dynamic component to APP's powerful inflection is how much cash it is generating. AppLovin is literally a Cash-Flow Machine: 167% YoY growth in Cash Flow:
While APP's conference call was not quite as “ecstatic” as PLTR's, they provided investors with some incredibly valuable data points:
The call included some great snippets as well:
"Now, looking ahead to 2024 and beyond, we continue to remain bullish about the potential of our core AI technologies, which stand amongst the most advanced across all markets. Our focus on leveraging these technologies for World in the CTV space and Array in the Carrier & OEM market is just the beginning.
We are poised to explore and expand into new applications of our AI technologies in the coming quarters and years, which has the potential to significantly broaden our TAM and opportunities
We look forward to continued growth over the coming year as we continue to expand our business into new verticals and industries such as non-gaming and CTV.
We launched AXON 2, the upgrade of our AI platform in Q2 last year. From that point to Q4, the business – the software business grew almost 50%... This is an early-stage technology. It's only been live for a little over half a year. It's growing exceptionally quickly, very high margin. We think the applications of this core technology are much broader than what we do today.
We've never been more excited about the growth prospects we've got in front of us."
Finally, with Axon 2.0 turning into Axon 3.0 at some point this year, my sense is APP will continue to Beat n Raise for the remainder of this year, with each future iteration of Axon amplifying the capabilities over the previous iteration.
AppLovin’s cash flow should reach $2B in 2025. TTD trades for a 30x cash-flow multiple. If we apply a 15x cash-flow multiple to APP, we get to a $30B market cap, or ~$89 for in 12 months. (This is one methodology that gets us to $89 by the end of the year).
The massive drop-down in leverage showcased in Q4 should accelerate further in the coming quarters. Based on the Q1 guide-up in EBITDA to $475M (at the mid-point), AppLovin is already approaching a $2B annualized EBITDA run-rate.
Typically Q1 is down, relative to Q4. Not so the case in 2024. Instead, Applovin's management team already guided to a 1.2% sequential bump. These guys know how to beat each quarter, so I am expecting APP’s first $1B quarter in Q1.
Earnings should grow sequentially all year and grow at triple-digit YoY levels most of the year.
For 2024, we see Revenue of $4.3-$4.4B and EPS of $2.44 (+130% YoY), with EBITDA margins of 52% translating to major upside to ~$2.26B. Nice dispersion vs the consensus at 11:55pm on Wednesday night:
Being a good old-fashioned growth investor, I love it when a stock gaps up 20% and it has BECOME CHEAPER even after its 20% run. This was the case with both SMCI and POWL, where our numbers for both the companies’ forthcoming fiscal years quickly doubled. These types of inflections are very rare.
If our numbers are right, do you see how APP at $55 is actually cheaper, even with it being up nearly 20% in the After Hours?
Another similarity APP shares with SMCI and POWL: the stock has been basing for 6 months. While it did break out of its base already, it was not extended from the base into the print. It is therefore a powerful formation with good odds of a follow-through.
We see sharp upside for the stock in the near-term. $62 -$75 seems viable reduce position size zones the next 2-6 weeks:
We bought as much as we could in the After Hours last night. We plan to add to our positions significantly with March 47.5 Calls.
This type of Beat n Raise should cause the shorts to cover, most likely in a frenzied fashion. There are currently 16M shorts.
It would therefore not surprise me to see the stock run to $60 at some point tomorrow. With earnings poised to go up 130% this year to $2.44, growth investors will bid APP up in the coming weeks, months and quarters. A 28x P/E is a modest Base-Case valuation. A 40-50x P/E is more than justified.
At 45x P/E, we would get to $109 at some time in 2025.
Our goal, at Inflections, is to under-promise and over-deliver for our subscribers. In this regard, we will happy to exit at $89 in a year, but we also understand why some investors would prefer to hold on for even longer.
Not to get too ahead of ourselves, but WHAT IF AppLovin's Axon 3.0 sees even higher adoption rates and the company starts buying back its stock? They could do $5 in 3 years.
A 45x P/E would get one to $225 in two years, discounting such results way ahead of time. By then, cash flows should be $2B+, annually. Maybe the cash flow multiple goes to 20-25x, especially if they sell off the mobile gaming business.
Goldman's PT already went to $73 late Wednesday night. We think there are some even higher PT's forthcoming and we expect them to go up into the $80s and $90s in the coming months and quarters.
APP is one of the best growth stories in AI. My conviction is a 10 on this thesis playing out.
While there are no guarantees in life – especially in the stock market – when all the key elements come together in an inflection point like APP, we size accordingly.
By 9:40am, Thursday morning, APP will be a Top 3 Position for us.
AppLovin certainly has some risks. We must certainly acknowledge the 5% short position in the stock. But to me, the Short Thesis is almost nonexistent when APP is seeing this type of growth. As such, I think the shorts will amplify the inflection in the stock tomorrow and in the coming days and weeks. We will see.
As for exiting, we plan to SLOWLY take some initial risk off in all of our APP positions as the stock moves into the low-to-mid-to-high $60s, and then towards $75 the next 2-6 weeks. At that point, we would probably scale up to the 55 calls and extend our duration into the summer. We will want to give the back half of our position - which we deem the long-term 6-12mo portion - a lot of time to get to our ultimate $89 PT.
STOP LOSS: We plan to have a STOP in place on a 1.5% close below the 10-day EMA, which should give us time for the thesis to play out, while also protecting our downside.
Thereafter, if our thesis is playing out longer-term, we would utilize a high-volume 1.5% close below the 50-day SMA as a signal to exit the remainder of our position.
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Disclosure: We long APP stock and in-the-money calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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