1 Incredible Reason to Buy AppLovin Before Aug. 6

Key Points

• AppLovin just completed a deal to sell off its mobile app business to Tripledot Studios.

• The move should improve its balance sheet and allow the company to focus on the fast-growing advertising business.

• AppLovin will report second-quarter earnings on Aug. 6.

• 10 stocks we like better than AppLovin ›

AppLovin (NASDAQ: APP) was one of the best performers on the stock market last year, but the mobile app-focused adtech company still gets relatively little attention in an era when investors are squarely focused on artificial intelligence (AI).

The stock jumped more than 700% last year, but its performance has been more modest this year, as investors seemed to have adjusted to the skyrocketing growth rate in its adtech business, which has emerged as the company's biggest profit driver.

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In fact, AppLovin is confident enough in its adtech business that it sold its mobile app game business to Tripledot Studios in a deal that closed at the end of June, right before the second quarter ended. That could signal a great buying opportunity for the stock before it reports second-quarter earnings.

Image source: Getty Images.

How the Tripledot deal could unlock value for AppLovin

First, the deal will allow AppLovin and its investors to focus on just AppLovin's strongest business, adtech, which helps advertisers optimize ad placements, primarily on mobile apps, through its Axon AI technology.

Second, AppLovin will receive $400 million in cash from the sale, as well as a 20% stake in Tripledot, giving it upside potential if Tripledot increases in value, which is currently at $2 billion, making the equity stake worth $400 million. It's unclear how AppLovin plans to use that cash, but it will help strengthen its balance sheet and could help it refinance its debt at a lower interest rate.

Finally, the stock has a lot of upside potential in its second-quarter report if it can top its guidance. AppLovin's ad business is growing rapidly, as advertising revenue rose 71% to $1.16 billion in Q1, while revenue from its apps business declined.

Its second-quarter guidance is calling for just modest sequential growth in ad revenue to $1.195 billion-$1.215 billion. If it can top that number, the stock could soar, as it's down more than a third from its peak earlier this year.

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Jeremy Bowman has positions in AppLovin. The Motley Fool has positions in and recommends AppLovin. The Motley Fool has a disclosure policy.