AppLovin Corp (NASDAQ: APP) continues its remarkable ascent, hitting new all-time highs daily, including a peak of $163.13 yesterday.
On October 22, Loop Capital initiated coverage on the stock with a ‘Buy’ rating and a $181 price target.
Analyst Rob Sanderson emphasized AppLovin’s indispensable role in the mobile gaming industry and its emerging position in big data and AI.
He noted that despite the stock’s impressive growth and recent breakout, it remains relatively undiscovered and misunderstood.
Sanderson also compared AppLovin to The Trade Desk, highlighting that AppLovin’s software business is larger with higher margins.
He suggested that an expansion into e-commerce advertising could significantly boost the company’s total addressable market.
AppLovin: strong Q3 earnings anticipated
The company is set to report its Q3 earnings on November 6, and expectations are high. Thirteen Wall Street analysts who cover the stock have a consensus forecast earnings per share (EPS) of $1.21 on revenue of $1.13 billion.
This represents a substantial increase from the EPS of $0.30 on revenue of $864.3 million reported in Q3 of the previous year.
Notably, all 13 analysts have revised their EPS estimates upwards in the last 90 days, reflecting strong confidence in AppLovin’s performance.
Mixed analyst ratings and price targets for AppLovin
While Loop Capital’s initiation adds a positive outlook, other analysts have varied opinions.
On October 14, Goldman Sachs downgraded the stock from ‘Buy’ to ‘Neutral,’ even as it slightly raised the price target from $147 to $150.
Analyst Eric Sheridan pointed out that after a 113% increase since the last earnings report, the risk-reward profile has become more balanced.
He acknowledged the company’s strong execution and profitability but advised caution ahead of the Q3 earnings.
Morgan Stanley maintained an ‘Equal-weight’ rating but raised its price target from $80 to $110.
Analyst Matthew Cost questioned the sustainability of AppLovin’s ambitious goal to grow its ad business by 20-30%, especially when consumer spending on mobile games is projected to grow by only 5%.
He noted that while the company has recently gained a significant edge, sustaining this growth may require outperforming competitors like Meta and Google.
Contrasting the cautious views, Citi increased its price target to $155 from $110, citing increased confidence in AppLovin achieving over 20% revenue growth.
Analyst Jason Bazinet highlighted multiple paths for growth, including incremental share gains in mobile gaming ad spend, higher take rates, and expansion into e-commerce advertising.
UBS also upgraded the stock to ‘Buy’ from ‘Neutral,’ raising the price target to $145 from $100.
The analysts expressed better visibility into revenue growth over the medium term and potential upside from expansion into new verticals like e-commerce.
AppLovin: business fundamentals show robust growth
AppLovin’s financial performance has been strong. In Q2 2024, the company reported revenue of $1.08 billion, a 44% year-over-year increase, driven largely by its software segment.
Adjusted EBITDA rose 80% to $601 million, resulting in a 56% adjusted EBITDA margin, up from 52% in the previous quarter.
The software platform contributed $711 million in revenue and $520 million in adjusted EBITDA with a 73% margin.
This growth is attributed to enhancements in their AXON system, improving the platform’s ability to identify high-value users for advertisers.
APP stock: valuation metrics
The stock’s rapid appreciation has led to higher valuation multiples. Some analysts caution that the stock may have outpaced its fundamentals.
For example, using a discounted cash flow analysis with optimistic assumptions, the stock still appears to be overvalued by about 10-20%.
Morningstar’s model also suggests a fair value below the current trading price.
However, forward-looking metrics indicate a significant decrease in the price-to-earnings ratio in the coming years, suggesting that the valuation may become more reasonable if growth continues as expected.
Insider selling raises concerns
Recent insider transactions have raised some eyebrows. The CEO sold stock worth $21.5 million, and other executives have also sold significant shares recently.
While insider selling can be for various reasons, substantial sales may indicate that insiders believe the stock’s upside potential is limited in the near term.
AppLovin’s ascent to new heights is underpinned by strong financial performance, strategic expansion plans, and positive analyst sentiment, albeit with some cautionary notes.
The upcoming Q3 earnings report will be a crucial indicator of whether the company can meet the high expectations set by analysts and justify its current valuation.
With the stock reaching new all-time highs and significant developments on the horizon, it’s an opportune moment to examine the technical factors that could influence its future trajectory.
Threefold returns YTD: Strong upward momentum for APP
AppLovin has been one of the best-performing large-cap tech stocks this year, rising nearly threefold thus far.
With the stock making new all-time highs every day, it is displaying exceptional upward momentum across timeframes.
Source: TradingView
Considering that investors and traders with a bullish view can buy the stock at current levels.
However, cautious investors with a bullish view can wait for a retracement or a minor pullback toward $138 levels before initiating fresh long positions.
Traders who want to take the opposite trade must refrain from doing so with the strong displaying strong upward momentum in the short-term charts.
A short position must only be considered if the stock hits resistance and starts making lower highs and lower lows.
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