AppLovin stock set to recover more than $1 billion of its vanished valuation after strong forecast

“For the first quarter of 2023, we see the mobile ad market remaining relatively stable,” the company initially said in a letter to shareholders. “Developers continue to closely monitor their overall profitability and advertisers appear to be maintaining overall ad budgets and return on ad spend goals, informing our outlook for the quarter.”

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AppLovin was worth more than $40 billion at its pandemic peak, but the stock has cratered 82% in the past 12 months, as Applovin attempted a $20 billion acquisition of rival Unity Software Inc.
U,
-1.06%
and failed. Unity’s stock, down 66%, also received an after-hours updraft of more than 6% Wednesday. In comparison, the S&P 500 index
SPX,
-1.11%
fell 9% over the past 12 months, while the and a nearly 18% fall on the tech-heavy Nasdaq Composite Index 
COMP,
-1.68%
fell nearly 18%.

Co-founder and Chief Executive Adam Foroughi told analysts AppLovin was investing to upgrade its proprietary Axon machine-learning recommendation engine with advances in artificial intelligence, or AI.

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“There’s been huge advancements in AI technologies, and we’re working on bringing those to our core platform,” Foroughi said. “Advertising is immensely competitive. There’s a lot of players that are trying to get ad dollars from advertisers, and trying to build algorithms to help those advertisers market themselves.”

For instance, Unity spent 2022 recovering from a disclosure in May that its Operate Solutions ad-targeting tools — the same tools that had been credited with finding a workaround to Apple Inc.’s 
AAPL,
-1.77%
 opt-out of using Identifier for Advertisers, or IDFA — contained a flaw.

“What we do know about our sector is that if algorithms improve, if targeting can get back to pre-IDFA levels, the category was growing almost double digits every single year consistently for a decade,” Foroughi said.

AppLovin noted it had $1.1 billion on its balance sheet at the end of 2022 for “key projects, strategic acquisitions, and share repurchases.” On the call, AppLovin Chief Financial Officer Herald Chen told analysts the company will “think carefully about capital allocation.”

AppLovin’s software helps app developers monetize through advertising, but it also has an apps business it manages like a standalone concern, and has sought to sell. AppLovin said it could still sell its app business, but in the meantime, it was comprised of “11 studios plus several publishing relationships that we believe can collectively increase enterprise value over time.”

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AppLovin topped Wall Street estimates for both of its segments in the fourth quarter. The company said that software revenue rose 24% to $306 million, while apps revenue fell 28% to $396 million. Analysts had expected $303.1 million in software revenue, and $313 million app revenue. For the fourth quarter, AppLovin reported an adjusted margins, however, improved for apps (19% versus 8% a year ago), but declined for software, 61% versus 71% a year ago.

AppLovin reported a fourth-quarter loss of $79.5 million, or 21 cents a share, versus net income of $31.1 million, or 8 cents a share, in the year-ago period. The company did not list adjusted earnings per share figures. Revenue fell to $702.3 million from $793.5 million in the year-ago quarter. Analysts had forecast earnings of 5 cents a share on revenue of $690.4 million.