Lung organoids display a tissue-specific functional phenomenon and mimic the features of the original organ. They can reflect the properties of the cells, such as morphology, polarity, proliferation rate, gene expression, and genomic profile. Alveolar type 2 (AT2) cells have a stem cell potential in the adult lung. They produce and secrete pulmonary surfactant and proliferate to restore the epithelium after damage. Therefore, AT2 cells are used to generate alveolar organoids and can recapitulate distal lung structures. Also, AT2 cells in human-induced pluripotent stem cell (iPSC)-)-derived alveolospheres express surfactant proteins and other factors, indicating their application as suitable models for studying cell–cell interactions. Recently, they have been utilized to define mechanisms of disease development, such as COVID-19, lung cancer, idiopathic pulmonary fibrosis, and chronic obstructive pulmonary disease. In this review, we show lung organoid applications in various pulmonary diseases, drug screening, and personalized medicine. In addition, stem cell-based therapeutics and approaches relevant to lung repair were highlighted. We also described the signaling pathways and epigenetic regulation of lung regeneration. It is critical to identify novel regulators of alveolar organoid generations to promote lung repair in pulmonary diseases.