Investing in the stock market can be challenging. Investors often don’t know where to start. However, even without subscriptions to data and analytics companies, they typically have access to fairly exact earnings and valuation data. These numbers should form the basis of any stock purchase.

Currently, my most successful investment ever is in an American software company Applovin (NASDAQ:APP). Since my initial purchase, the company has grown by approximately 1,500% and in fact remains one of my daughter’s largest holdings. So what made it such a great choice?

Value proposition

I first bought AppLovin stock about two years ago. My notes show that the company’s shares were worth about 43 times the previous 12 months’ earnings, but only 14 times next year’s earnings.

This indicated the company’s impressive growth trajectory. Profit growth was forecast to be 150% and the evidence showed that this was not a one-off or a good year.

No wonder it was about artificial intelligence (AI). The company had just released a recent artificial intelligence model that greatly increased the efficiency of app monetization – it did not open the application, but provided software for programming, advertising and monetization.

This resulted in a forward earnings per share growth rate of approximately 45%. In other words, analysts expected earnings to grow by this amount annually over the medium term. The price-earnings-to-growth ratio was around 0.5, indicating seriously undervalued conditions.

Keep winning

I haven’t always been the best at stopping winners. I remember selling BAE systems shares before Russia invaded Ukraine and took 30% of the profits. If I had held on, I would now be up 400%.

But I’ve held AppLovin through multiple earnings cycles, and it’s just blowing away analyst expectations. The dynamics were enormous, and analysts had to constantly revise their expectations upwards – this is always a good sign.

However, sometimes there comes a time when you need to question the valuation. I’ll say it again: numbers are the most vital thing. Because investing is about making probability-weighted decisions.

AppLovin is currently trading at 55 times forward earnings, but has an average medium-term earnings growth rate of 20%. This gives us a PEG ratio of 2.8. That’s almost six times more than when I bought the stock.

To me this suggests, based on probability analysis, that the stock won’t go much higher. I could absolutely be wrong as AI stock still has a lot of momentum, but the data tells me it’s at or above fair value.

Lessons learned

I don’t expect AppLovin to stick around much longer in the family portfolios I manage. However, I hope to put this money to good apply in the future by following the same model. The stock market may be a little heated, but there are certainly more companies to buy today with similar growth prospects and better valuations. And just to be clear, I don’t think AppLovin is worth considering today.