Applovin-This Billionaire Just Bet Big on a Controversial AI Stock. Should You?

Core Viewpoint - AppLovin has attracted controversy due to bearish reports from short sellers, yet a significant investment from billionaire Chase Coleman indicates strong confidence in the company's future growth potential [1][3]. Investment Activity - Chase Coleman of Tiger Global Management purchased nearly $575 million worth of AppLovin stock, making it his largest new position in the first quarter, representing 1.7% of his portfolio and ranking as his 16th-largest holding [2][3]. Business Model and Technology - AppLovin operates an advertising platform for gaming app companies and is selling a legacy portfolio of gaming apps. The introduction of Axon 2, an AI-based advertising technology, is expected to drive substantial revenue growth [5][8]. - Axon 2 utilizes predictive machine learning to enhance ad targeting, bidding, and placement, aiming to identify gamers likely to engage with ads and maximize return on ad spending [6][8]. Financial Performance - In 2022, AppLovin generated$ 2.8 billion in revenue, which is projected to grow to $4.7 billion by 2024. In Q1 2023, revenue increased by 40% to$ 1.48 billion, with advertising revenue surging 70% to $1.16 billion [9]. - The company's gross margin improved significantly, rising from 55.4% in 2022 to 75.2% in 2024, and further to 81.7% in Q1 2023 [10]. Competitive Landscape - AppLovin's growth appears to be at the expense of competitors like Unity Software, which has seen a decline in revenue in its adtech business [11]. - The company anticipates long-term revenue growth from gaming clients in the 20% to 30% range, with plans to expand Axon 2's application to the e-commerce sector [12]. Valuation - Despite significant stock gains over the past two years, AppLovin's valuation remains reasonable, with a forward price-to-earnings (P/E) ratio of just under 45 and a price/earnings-to-growth (PEG) ratio of 0.56, indicating potential undervaluation [13].