BREAKINGVIEWS-Torrid AppLovin reignites scorching PAIR trade

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jonathan Guilford

NEW YORK, Feb 13 (Reuters Breakingviews) - A Fiery Foursome is nipping at the Magnificent Seven. The market-dominating technology septet – Alphabet GOOGL.O, Amazon.com AMZN.O, Apple AAPL.O, Meta Platforms META.O, Microsoft MSFT.O, Nvidia NVDA.O and Tesla TSLA.O – account for some $18 trillion in collective equity value after a 67% surge in 2023, based on the Roundhill ETF tracking them. A quartet of challengers, however, have been skyrocketing even faster.

AppLovin APP.O leads the pack. The mobile advertising company is branching far enough beyond gamers that it unveiled plans on Wednesday to sell its division that develops apps. It’s easy to see why: the anticipated $900 million sale price accounts for just 3 times trailing EBITDA, Jefferies analysts reckon. With an enterprise value that touched $170 billion early on Thursday, it’s trading at more than 60 times last year’s profit.

A 30% jump in the stock price helps even more, adding to last year’s 735% gain, which outpaced the Nasdaq 100 Index .NDX. AppLovin’s advertising revenue is growing 75% annually, and unlike so many of its tech peers, the growth is seriously profitable. After adjusting for stock-based compensation, last year’s EBITDA margin for the unit clocked in at a whopping 76%.

It’s shrewd, albeit bold, for boss Adam Foroughi to think big. Total U.S. spending on in-game ads last year was just $8 billion, according to research firm eMarketer, while overall digital marketing exceeded $300 billion. Google and YouTube parent Alphabet, along with Facebook and Instagram owner Meta, collect about half of worldwide ad spending. Advertisers want competition.

Others are trying to break industry strongholds, too, and rapidly attracting backers. Defense software developer Palantir Technologies’ PLTR.O shares skyrocketed nearly 360% last year, as it jousts with a market dominated by a small clutch of big operators. IonQ IONQ.N, whose stock surged more than 240% in 2024, is trying to crack the wild world of quantum computing by taking aim at conventional processors and other dream-seekers such as IBM IBM.N. Following its initial public offering less than a year ago, social network operator Reddit RDDT.N more than doubled its market capitalization as it takes on Facebook and X.

Put them all together and call this group of tech insurgents the PAIR trade. At less than $500 billion combined, they’re worth a mere fraction of the Magnificent Seven. Even that group started small, though, before achieving such lofty status.

Follow @JMAGuilford on X

CONTEXT NEWS

Mobile gaming and in-app advertising company AppLovin said on February 12 that it generated $4.7 billion of revenue in 2024, a 43% increase from the previous year.

Its advertising division’s EBITDA margin reached 76%, after adjustments, including for stock-based compensation.

AppLovin shares were up about 27%, to $482.52, at 1200 EST on February 13.