This Billionaire Just Bet Big on a Controversial AI Stock. Should You?
AppLovin's technology has come under scrutiny from short sellers.
However, renowned tech investor Chase Coleman initiated a new position in the stock last quarter.
The company has been seeing tremendous growth and trades at a reasonable valuation.
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AppLovin (NASDAQ: APP) has been a lightning rod for controversy recently, with three separate short sellers issuing bearish reports on the company this year. However, one billionaire investor was clearly unconvinced by the reports, making AppLovin stock the largest new position in his portfolio during the first quarter.
Billionaire Chase Coleman of Tiger Global Management bought nearly $575 million worth of AppLovin stock last quarter, the most he bought of any stock in the period. The stock now represents a 1.7% position and is his 16th-largest holding.
Coleman is a highly successful, growth-oriented investor specializing in tech stocks who generally takes a long-term view. He tends to maintain a concentrated portfolio and isn't afraid to be aggressive. As such, his purchase of AppLovin stock is a big vote of confidence in the stock. Investors like Coleman have a lot of resources and connections, and he surely did his due diligence before investing.
AppLovin's core business is an advertising platform that gaming app companies use to help them attract and better monetize users. It also owns a legacy portfolio of gaming apps that it is currently in the process of selling.
The introduction of its Axon 2 artificial intelligence (AI)-based advertising technology in the second quarter of 2023 helped transform the company and set it on a path of huge revenue growth.
According to the company, the AI-advertising engine uses predictive machine learning to improve ad targeting, bidding, and ad placement. Its goal is to find gamers most likely to download apps or engage with an ad. Meanwhile, Axon 2 helps predict which ads will yield the highest return on ad spending budgets.
However, not everyone is buying into what Axon 2 does. Short sellers have basically accused AppLovin of installing apps onto users' devices without their permission. This would be a serious violation of most app stores, which could lead to its software getting banned on these platforms.
AppLovin has denied the allegations and even hired lawyers to investigate the short sellers. CEO Adam Foroughi said the complexity of Axon 2.0's technology has allowed short sellers to "stir fear and doubt," and he told investors to "dig deeper." Coleman apparently took up Foroughi's challenge to dig deeper, leading to his sizable investment in the company's stock.
While there have been some questions around Axon 2's technology, there is no question that it has led to tremendous growth for the company.
In 2022, the year before AppLovin launched Axon 2, the company generated $2.8 billion in revenue. Two years later, in 2024, its revenue had grown to $4.7 billion. That growth continued into the first quarter of this year, with AppLovin's revenue climbing 40% to $1.48 billion. Meanwhile, its advertising revenue surged 70% to $1.16 billion.
Not only has Axon 2 led to strong revenue growth, it has also greatly improved the company's gross margin, which lead to greater profitability. In 2022, its gross margin was 55.4%, while in 2024 it had risen to 75.2%. The gross margin expansion also continued into Q1, rising to 81.7% from 72.2% a year earlier.
It's also worth noting that AppLovin's success has seemingly come at the expense of rival Unity Software, whose adtech business (its growth solutions segment) lost revenue in 2024 and Q1 2025. So AppLovin is not riding an industry tailwind; its solution is taking market share and customers away from competitors.
Longer term, AppLovin has talked about revenue growth from gaming customers settling into the 20% to 30% range. This would come from algorithm improvements and the natural growth of the gaming app industry.
However, the company thinks that Axon 2's more predictive nature and increased use of automation can help it expand beyond its core gaming clients. It is currently testing the solution within the e-commerce vertical and expects it to have a meaningful contribution this year.
Despite the stock posting some huge gains over the past two years, its valuation is still reasonable with a forward price-to-earnings (P/E) ratio of just under 45 times and a price/earnings-to-growth (PEG) ratio of 0.56 times. A PEG ratio below 1 is typically viewed as undervalued.
While the short-seller accusations against the company are a bit scary, purchases of the stock by an investor as renowned as Coleman should help allay those fears. As such, I think given AppLovin's growth opportunities and current valuation, investors can take a small position in the stock at current levels.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AppLovin and Unity Software. The Motley Fool has a disclosure policy.
This Billionaire Just Bet Big on a Controversial AI Stock. Should You? was originally published by The Motley Fool
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