Meet the Impressive Growth Stock That's Up More Than 700% Since IPO and Is Poised to Join the S&P 500

On Sept. 5, S&P Global announced that advertising-technology company AppLovin (APP 0.79%) would be added to the S&P 500 index later this month — a milestone in AppLovin’s publicly traded journey that was unimaginable just three years ago.

AppLovin makes money by helping to get its customers’ apps — usually mobile video games — discovered and monetized. But three years ago, its business results were mediocre. In fact, it almost seemed like management was ready to throw in the towel, considering that it made an unsolicited proposal to merge with Unity Software in a deal that would have put Unity’s management in charge of the combined entity.

Unity declined the offer, but it likely regrets that decision now. In the years since AppLovin’s proposal, Unity’s stock price is down 13%. But AppLovin’s stock price has jumped 1,480%. 

Here’s how AppLovin became a red-hot growth stock, how it can keep its momentum going, and whether its inclusion in the S&P 500 index is a game-changer for the company.

How AppLovin got here

At one point, AppLovin had its own mobile video game business. But its goal for that segment was to collect first-party data that it could use to build artificial intelligence (AI) models. After collecting enough data, it launched its Axon 2 software in the second quarter of 2023. And this new iteration of its software catalyzed its growth.

The chart below shows both overall revenue growth for AppLovin as well as its growth rate — which has averaged better than 27% year over year in the quarters since the launch of Axon 2.

Data by YCharts.

According to CEO Adam Foroughi, AppLovin doesn’t generate revenue through ad impressions or clicks, but only when the goals of its customers’ ad campaigns are met. This twist on the usual adtech business model aligns the company’s success with its customers’ successes.

This is likely why AppLovin has been able to grow so fast. Consider that management expects to generate over $1.3 billion in revenue in the third quarter. This will only represent software revenue, as it sold its mobile app business early this year. (It has already gotten all of the data it needs from those apps.) For comparison, its software business only generated $500 million in revenue in 2023’s third quarter.

To put it simply, AppLovin’s growth has been absolutely red-hot since Axon 2.

Can AppLovin grow from here?

AppLovin has historically managed full ad campaigns for its customers, but it’s adding a self-serve platform option. According to Foroughi, this new option will be foundational for its growth in the coming decade.

A lot of companies might want the added control that comes with a self-serve option, which is why this is an important development for AppLovin. Moreover, AppLovin is expanding outside of gaming and into other verticals, with e-commerce being one particular area of focus.

AppLovin was able to grow rapidly in a space that was experiencing little growth overall. This suggests that its software is good, and possibly great. And now, management is widening the market that it’s targeting. This business could indeed sustain long-term growth for these reasons alone. 

Is AppLovin’s inclusion a game-changer?

AppLovin stock will be added to the S&P 500 on Sept. 22. Will this make it an even more compelling investment opportunity?

Investors who buy AppLovin stock today need an investment thesis — one or more logical reasons to believe the business can grow and become more valuable in the coming years. Its AI software success, a potentially more appealing platform for newer customers, and a widened reach could all be legitimate parts of a solid investment thesis.

By contrast, AppLovin’s inclusion in the S&P 500 has more to do with the stock and the company’s market cap than the business. In fairness, its ascension to the index does bring some potential fringe benefits. First, the news could expose the company to more investors. Second, many index funds must now buy AppLovin shares to keep their portfolios in sync with the S&P 500’s components. Such purchases can give stocks a short-term boost.

However, AppLovin’s inclusion in the S&P 500 will wane in significance in the coming months and years. Just look at The Trade Desk — its stock has fallen by nearly 42% since it was added to the index in July. In short, a company’s inclusion doesn’t guarantee it will provide good investment returns.

If AppLovin stock is a winner from here, it will likely be because it attracted more customers and succeeded in verticals beyond mobile gaming. Those are the trends I would suggest watching in the coming quarters. And for what it’s worth, I believe that AppLovin can be successful as it branches out.