AppLovin (APP) Stock May Face More Momentum After 687% Rally

I invested in AppLovin (APP) when the company was worth less than $15 billion. Today this number It is valued at more than $113 billion after rising 687% over 12 months. However, I am a little concerned that momentum may be low simply because the company’s valuation may be unsustainable unless it can provide further catalysts. Right now, I’m neutral on this stock, given the evolving interest rate environment, the potential for increased risk-off sentiment, and the stock’s valuation.

Although I’m now neutral on the stock, I have to point out that the company’s rise has been nothing short of remarkable. AppLovin’s rise in the mobile advertising and gaming industry can be attributed to several major factors. At the heart of its success is Axon’s AI-powered engine, which has revolutionized ad targeting and delivery. This innovative technology, initially an unknown entity, constantly learns and improves the data, ensuring that ads reach the right audience at the optimal time, dramatically enhancing user engagement and ad effectiveness.

AppLovin’s strategic focus on the mobile gaming sector, a market expected to achieve significant growth, has been fundamental to the company’s success. Furthermore, AppLovin’s unique combination of game development expertise and targeted advertising capabilities gives it a competitive advantage over traditional advertising platforms.

In contrast, its financial performance has impressed the market, with AppLovin recording a 39% year-over-year revenue increase to reach $1.2 billion in Q3 2024. Meanwhile, Earnings per share more than quadrupled to $1.25where third-quarter earnings beat expectations by an incredible $0.33. Looking to the future, the company’s expansion into new sectors, especially e-commerce, provides significant growth opportunities, taking advantage of… Amnesty International Capabilities in these new sectors can increase their success.

I’m currently neutral on AppLovin, because despite its impressive profitability and growth prospects, the valuation is difficult to justify. Company Financial metrics paint a picture of a high-performing business With great potential, however the current market assessment seems to factor in exceptional future performance.

Starting with the positives, AppLovin delivers exceptional profitability metrics, with an EBIT margin of 35.8% and a net income margin of 26.8%, both well above the industry average. The company’s revenue growth is equally impressive, with a 41.5% increase year over year, far exceeding the sector average of 4.4%. It is an efficient operator, and the business is growing significantly.

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However, the evaluation metrics are very rich. The company’s price-to-earnings (P/E) ratio is 64.8 times which is 159.5% higher than the sector average. Likewise, its EV to EBITDA ratio of 63.9x is 198% higher than the industry average. These ratios indicate that investors expect exceptional earnings growth in the coming years.

While AppLovin’s consensus earnings growth estimates are very strong, with projected growth rates of 313.5% for 2024 and 46.5% for 2025, the current valuation calls for sustained exceptional growth over the medium term. A price-to-earnings-to-growth (PEG) ratio of 2.6, which is 43.3% higher than the sector average, suggests that the stock could be overvalued relative to its expected growth.

For AppLovin’s valuation to be justified, the company will need to consistently beat these already high expectations, and deliver massive profits in the coming quarters and years.

Interestingly, market expectations for the current quarter are in line with the $1.25 delivered in Q3. If these forecasts turn out to be correct, it will be the first time in eight quarters that earnings have not improved sequentially.

My hunch is that AppLovin will surprise again to the upside. However, it may need a significant increase to justify the valuation and generate more momentum in the stock price.

My concerns about AppLovin’s stock price momentum are also influenced by the Federal Reserve’s stance Which suggests there will be fewer interest rate cuts in 2025. The announcement on Wednesday, December 20 sent AppLovin’s stock price down nearly 7%.

On TipRanks, APP comes in as a Moderate Buy based on the 14 Buys, four Holds and one Sell assigned by analysts in the past three months. Moreover, Average APP stock price target It is $323.67, which implies a downside risk of 4.24%.

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AppLovin’s rise has been nothing short of dramatic. However, despite great profitability metrics, strong growth outlook, and new sectors, I’m neutral on a stock that has brought me such strong returns. The company’s impressive performance in Q3 2024, with $1.2 billion in revenue and a 39% year-over-year increase, highlights its potential.

However, the stock’s valuation raises major concerns. With a forward P/E ratio that is 159% above the sector average and an EV/EBITDA multiple that indicates an extraordinary outlook, AppLovin stock will likely lack momentum unless we see a big earnings beat. While the AI-driven technology and expansion strategies are promising, it is difficult to invest more in this stock right now.

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