Investing.com -- Shares of AppLovin Corporation (NASDAQ:APP) rose in pre-market trading on Tuesday following an upgrade from UBS, reflecting renewed investor confidence in the company’s medium-term growth prospects.
UBS analysts upgraded AppLovin to a "buy" rating from their previous "neutral" stance, driven by increased visibility into the company's ability to sustain revenue growth and its favorable valuation.
The revised 12-month price target was also raised to $145 from $100 per share.
According to UBS, the upgrade is based on AppLovin's strong positioning in the digital advertising sector, particularly in gaming.
AppLovin's proprietary ad tech, Axon 2.0, which enhances return on ad spend (ROAS) for advertisers, was identified as a key driver for revenue growth.
“APP's improved relative return on ad-spend (ROAS) vs competing channels is rarely seen in the digital ads space and could support 20-30% software rev growth from gaming alone,” the analysts said, with further long-term growth anticipated from AppLovin’s expansion into the $140 billion e-commerce advertising market.
UBS analysts believe the company’s valuation, at 13.7x projected FY25 adjusted EBITDA, provides a solid entry point for investors, especially considering the anticipated 20% compound annual growth rate in revenue over the next two years.
“We model FY26 EBITDA margin of 60% vs Street at 58% primarily driven by mix shift. Within the software segment which accounted for 85% of Total EBITDA in FY23 we look for incremental margins to stabilize at ~75% vs Street at 72%,” the analysts said.
Additionally, UBS analysts flagged that the company’s ability to improve ROAS has led to a shift in advertiser budgets toward AppLovin's platform.
Industry checks indicated that AppLovin is increasingly becoming the top choice for gaming user acquisition, overtaking competitors like Google (NASDAQ:GOOGL) and Unity (NYSE:U).
Some advertisers noted that AppLovin is now their largest advertising channel, ahead of even Google.
UBS believes that AppLovin’s future growth will not be confined to gaming. The expansion of Axon 2.0 beyond gaming to non-gaming verticals, particularly in e-commerce, is expected to drive significant incremental growth.
UBS expects AppLovin to monetize its 1.5 billion daily active users (DAUs) at a higher rate as more non-gaming advertisers come onto the platform.
By FY26, AppLovin’s software segment is expected to account for a larger share of revenue as the company attracts advertisers from sectors like e-commerce and social media.
Analysts at UBS also added that licensing Axon 2.0 to sub-scale advertising platforms could unlock additional growth.
The partnership with Flip is the first example of this strategy, and UBS projects that similar deals with other platforms could provide 25% upside to FY26 revenue estimates.
UBS’s new $145 price target reflects 25% upside potential from AppLovin’s current share price of $116.25.
UBS analysts believe the market has not fully priced in the potential of AppLovin's expansion into e-commerce advertising and its ability to capture a larger share of the digital ad market.
Shares of the company were up 2.4% in pre-open trade.