Meet the Newest Artificial Intelligence (AI) Stock in the S&P 500. It's Up 5,660% Since 2023, and It Could Still Climb Higher From Here.

Key Points

• The S&P 500 will update its constituents on Sept. 22, adding three new companies, including this booming AI stock.

• Its excellent algorithms have produced excellent results for its clients, and it's expanding to new services.

• Several developments could accelerate its growth in 2026 and beyond.

• 10 stocks we like better than AppLovin ›

The S&P 500 is often used as the benchmark index for the stock market as a whole.

While the index only contains 500 companies, it represents about 80% of all U.S. equities by market capitalization. Becoming a member requires more than just a large market cap, though. Companies must also show consistent profits, and their stocks must also have sufficient liquidity.

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Every quarter, a selection committee decides who's in and who's out. If a company in the S&P 500 fails to meet the criteria, it'll get booted from the index. If its value drops too much, the committee will remove it as well. The committee then selects a batch of new entrants to replace those leaving the index.

This quarter, the committee added digital advertising company AppLovin (NASDAQ: APP) to the S&P 500. The company, along with Robinhood Markets and Emcor, will replace MarketAxess, Caesars Entertainment, and Enphase Energy on Sept. 22.

AppLovin is the most recent AI stock to join the S&P 500, which is already full of AI giants. While the stock has soared more than 55-fold since the start of 2023, it could still climb higher from here. Here's what investors need to know.

Image source: Getty Images.

Why everybody's lovin' this stock

AppLovin offers marketers a simple solution for getting great returns on their advertising spend. The adtech company takes a marketer's budget, its target market, and its desired return on ad spend, and effectively targets ads across its supply network to hit those marks. Importantly, AppLovin doesn't get paid unless the ads work based on third-party measurement data.

The entire process is managed by its Axon 2 advertising optimizer. Axon 2 is built on machine learning AI models that use years of first-party data gathered from AppLovin's own games (which it divested this year) and previous ad placements.

Axon 2 went live in the first quarter of 2023, and the results have been impressive. AppLovin has seen its software platform revenue climb from just over $1 billion in 2022 to $4.25 billion over the last four quarters.

What's more, AppLovin is expanding its business beyond in-game ads. It's adding connected-TV advertising through its acquisitions of Wurl and MoPub, and it's building an e-commerce advertising engine.

While AppLovin has seen tremendous results from its Axon 2 platform over the last few years, it could see even stronger growth over the next few years.

Can the stock head higher from here?

There are a few reasons to be optimistic that AppLovin can continue to grow its revenue and profits.

As the company expands into new ad formats, it's developed a self-serve platform. A self-service ads manager removes the bottlenecks of manually onboarding new clients every month, invoicing them, and collecting and providing third-party attribution data. Management notes that it also provides the framework for AI agents that can automate more of the workflow.

Indeed, generative AI could play a significant role in the future of AppLovin. CEO Adam Foroughi said the company expects to be able to use AI to generate "countless iterations and dynamically [select] personalized creatives for each user." Catering the ads for the person that sees them can increase conversions, which directly benefits AppLovin's top line, thanks to its sales model.

With the self-serve platform in place, management plans to scale its offering by advertising it to marketers starting next year. Considering advertising is what it does best, it should be able to produce strong conversions. And with the ability to automate the onboarding process, it can grow its marketing spend to spin the growth flywheel faster and faster.

However, there is concern that AppLovin may not be able to scale Axon 2 as much as anticipated. After all, the platform works by identifying undervalued ad inventory and producing a high return on purchasing those spots. As more marketers use its algorithm, it might not be able to hit those return on ad spend targets its clients are asking for.

AppLovin's stock price isn't exactly cheap. It currently trades for about 45 times forward earnings expectations and 37 times sales expectations. That makes the stock a particularly risky investment right now. But if it successfully implements its self-serve platform and can scale the business with paid marketing, it can justify the price and keep climbing from here.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends EMCOR Group. The Motley Fool recommends Enphase Energy and MarketAxess. The Motley Fool has a disclosure policy.