Palantir Technologies(NYSE:PLTR) is one of the hottest stocks of 2024, but I think there’s another popular artificial intelligence (AI) software stock that investors should also consider. AppLovin‘S (NASDAQ: APP) The stock price is up over 650% so far this year, which far exceeds the whopping 250% gain seen in Palantir stock (all returns are at the time of writing).
While Palantir is getting a lot of attention because its data collection, analytics, and AI platform is being used successfully by the U.S. government and several commercial entities, AppLovin’s business has flown under the radar. The company owns an existing gaming app business, but its core business is advertising technology used by mobile gaming companies and others to attract and better monetize users.
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Let’s take a closer look at why investors should consider investing in this stock, even after its huge gains this year.
AppLovin has generated spectacular revenue growth since the launch of its new AI-powered adtech platform Axon-2 (launched in Q2 2023). That growth continued last quarter, when software revenue rose 66% year over year to $835 million, while total revenue rose 39% to $1.2 billion.
Just as important as the revenue growth, the company has also seen a lot of operating leverage in its business, leading to even stronger profitability growth. Last quarter, gross margins improved to 77.5%, compared to 69.3% a year ago, while the company cut sales and marketing expenses by 3%.
This led to AppLovin’s earnings per share (EPS) more than quadrupling from $0.30 a year ago to $1.25, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 72% to $722 million.
Ultimately, the company expects long-term revenue growth of between 20% and 30% just from its gaming customers, but if it can take its adtech platform beyond its core gaming vertical, there’s certainly an opportunity to continue its growth to make. to exceed its long-term target. The company has also said that it can grow more than 30% per year in the gaming segment if it can start implementing more than one major improvement to its adtech platform per year.
Outside of gaming, AppLovin has just started testing its adtech platform within the broader e-commerce sector. The company says results so far have been good and believes e-commerce can make a meaningful contribution as early as next year. It will open a broader self-service platform in the coming quarters.
If the company can innovate quickly and expand beyond gaming, it should see continued, outsized revenue growth for years to come.
Image source: Getty Images.
In addition to continued growth opportunities, AppLovin continues to trade at an attractive valuation despite huge gains in its stock this year. Based on next year’s analyst estimates, the stock trades at a price-to-earnings (P/E) ratio of just over 45 times, while it has a price-to-earnings (PEG) ratio of 1.1 times. A PEG ratio of less than 1 is generally considered undervalued, but growth stocks often have PEG multiples well above 1. So I’d say AppLovin is still trading at an attractive valuation based on its long-term growth prospects.
Meanwhile, compared to Palantir, AppLovin’s valuation is much lower. Palantir trades at 40 times next year’s revenue, while AppLovin trades at 45 times next year’s revenue. Meanwhile, AppLovin has also grown its revenue faster. Last quarter, total revenue grew 39%, while Palantir grew revenue 30%.
APP PE Ratio data (1 year ahead) according to YCharts
In December 2022, investors could have bought AppLovin shares for less than $10, so investors could have turned a $35,000 investment into more than $1 million in less than two years if they had held onto the shares.
I wouldn’t expect those kinds of returns from AppLovin in the future, but I continue to think the stock could be a good option to consider for investors looking to build a portfolio that wants to make millionaires. I first wrote positively about the stock in April, when it was up 375% over the past year and the stock hasn’t slowed down a bit. Although the valuation has increased since then, the growth opportunities remain and the stock is still not pricey.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in AppLovin and Palantir Technologies. The Motley Fool has a disclosure policy.
Should You Buy These Millionaire-Maker AI Stocks Instead of Palantir? was originally published by The Motley Fool
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