Three reasons why this top AI stock surged 25% higher

Shareholders of AppLovin (NASDAQ:APP) stock are no doubt loving its performance, as the stock price surged 25% on Thursday after the AI company released blowout fourth quarter earnings.

It is just the continuation of the momentum this AI stock has enjoyed for the better part of the past two years. In 2024, AppLovin stock returned a ridiculous 712%. Over the past 12 months, as of February 13, it is up 935%, and year-to-date it has already climbed 46% to $468 per share.

The latest jump on Thursday was fueled by three primary factors, including its fourth quarter earnings results.

Earnings soar 248%

AppLovin may not get the attention of other AI stocks like NVIDIA (NVDA) and Palantir (NASDAQ:PLTR), but it has outperformed them both. The company has developed an AI-based software platform that allows app developers to market and monetize their apps. The AI software finds the most relevant users for the apps, mostly mobile games. It also helps monetize those apps using AI to create auctions for ads. And it earns a portion of the revenue on all of the ads it helps generate for its customers.

A look at its Q4 results shows its incredible results. The firm generated $1.37 billion in revenue in the quarter, up 44% year-over-year. That was better than the $1.26 billion that analysts expected. About $1 billion of that revenue came from the advertising business, up 73% from the same quarter a year ago. The app revenue was down 1% to $373 million.

For the full year, revenue was up 43% to $4.7 billion, with ad revenue rising 75% to $3.2 billion. App revenue gained 3% to $1.5 billion.

In terms of the bottom line, AppLovin saw net income climb 248% to $599 million in Q4, or $1.73 per share. That blew away estimates of $1.24 per share. For the full year, net income rose 343% to $1.58 billion, or $4.53 per share.

AppLovin to divest its apps business

The firm announced that it was selling off its apps business, which is its platform that it sells to customers to market their apps. This business is the smaller of the two and had been lagging the advertising business. In Q4, it saw revenue decline 1% compared to the 44% revenue growth in the advertising space.

CFO Matt Stumph said on the earnings call that the company was divesting its apps business to a private company for $900 million, including $500 million in cash and a minority equity stake in the combined private company. It will look to close the deal in Q2.

Chairman and CEO Adam Foroughi said the company plans to focus its resources on expanding its successful ads business, looking beyond mobile gaming to companies. And the demand for companies looking to access its advertising platform is high.

“This opens up a massive opportunity as there are over 10 million businesses worldwide who advertise online that could eventually use our platform profitably,” Foroughi said on the earnings call. “Where we once focused on gaming, we’re now positioning ourselves to serve the entire global advertising economy.”

Analysts upgrades

The company expects advertising revenue to keep growing in Q1, with an outlook for between $1.30 billion and $1.50 billion in revenue, which would be up from Q4 at the midpoint.  Adjusted EBITDA for advertising is targeted to fall between $805 million and $825 million, which would also be up at the midpoint. Apps revenue will fall to a range of $325 million to $335 million.

Analysts are bullish on its continued advertising growth and its decision to divest the apps business and focus on the fast-growing advertising segment.

UBS, for example, raised its price target by $190 to $630 per share, which would be a 38% gain. BTIG boosted it by $163 per share to $600 per share, which would be a 32% spike. Also, BofA and JPMorgan Chase both gave it massive upgrades. Overall, about nine Wall Street analysts raised their price targets for AppLovin.

That vote of confidence for the earnings and the divestment certainly helped drive the stock price higher.

Investors should be wary of the valuation though, as the P/E ratio for AppLovin stock has jumped to 84, with a forward P/E of 50. The P/E is up from 55 at the end of September, while the forward P/E is up from 20 since then.