AppLovin Corporation Shows Signs of Recovery Amid Market Challenges

AppLovin Corporation (APP) has experienced a notable 22% stock decline over the past three months, slightly more than the 18% decrease seen across the industry. Competitors in the mobile in-game advertising sector have also faced challenges, with shares of Alphabet Inc. (GOOGL) dropping 18% and Meta Platforms (META) declining by 19% during the same timeframe.

However, APP saw an encouraging rebound of 8% in the last month, suggesting a potential recovery. Given the similar struggles faced by major players like Alphabet and Meta Platforms, APP’s performance aligns with broader industry trends.

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This analysis will assess whether APP’s current valuation, in line with Alphabet and Meta Platforms, presents an attractive opportunity for investors.

Strategic Shift Toward a High-Margin Business Model

AppLovin is moving towards a pure-play advertising model, with an emphasis on high-growth, high-margin segments. A key milestone was the $900 million sale of its gaming division to Tripledot Studios. This divestiture enables APP to focus on its advertising technology, aligning with its goal of serving over 10 million businesses in the global digital advertising market. To tap into this vast opportunity, the company is investing in automation and developing tools to enhance customer efficiency and maximize ad performance.

Strong Financial Performance Underlines Growth Potential

AppLovin’s recent earnings report highlights its solid financial health and growth trajectory. The company continues to leverage its AXON 2.0 technology and strategic expansions in the gaming and in-app advertising spaces. In the fourth quarter of 2024, revenues soared 44% year over year and grew 14% sequentially, driven by strong market demand. Adjusted EBITDA increased by 78% from the previous year and 17.5% sequentially, demonstrating enhanced operational efficiency. Net income rose dramatically by 248% year over year and 38% sequentially, reflecting APP’s ability to convert revenue growth into considerable profitability.

For the full year of 2024, revenues increased by 43% year over year, with adjusted EBITDA up 81%, showcasing AppLovin’s ability to capitalize on market opportunities while maintaining efficiency. Management anticipates sales of $1.4 billion for the first quarter of 2025, slightly above the Zacks Consensus Estimate of $1.37 billion. Historically, AppLovin has consistently exceeded earnings expectations, increasing the likelihood of further outperformance.

Analysts Project Robust Earnings Expansion

Analysts are optimistic about AppLovin’s earnings growth. The Zacks Consensus Estimate for first-quarter 2025 earnings is projected at $1.45 per share, a remarkable 116.4% increase from the same quarter last year. Furthermore, earnings for 2025 and 2026 are expected to grow by 47.5% and 38.5%, respectively. Despite recent stock weakness, the long-term earnings outlook for APP remains promising.

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Cautious Outlook from Analysts

In the past 60 days, analysts have shown slight caution regarding AppLovin’s future earnings. Three estimates for 2025 and 2026 have been revised downward, with no upward revisions noted. Consequently, the Zacks Consensus Estimate for 2025 earnings has decreased by 2.8%, while the 2026 estimate has dipped by 1.8%. This trend signals that, while growth remains projected, some analysts are tempering their expectations. Investors should keep an eye on whether these downward revisions continue.

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Valuation Raises Concerns Over Potential Overpricing

Currently, APP trades at a forward 12-month price-to-earnings (P/E) ratio of 37.9, markedly higher than the industry average of 24.33. This premium indicates that investors are expecting robust future earnings from APP, yet it may also suggest the stock is overvalued compared to peers. If the company does not meet these elevated expectations, the stock could face downward pressure. Thus, investors should carefully consider APP’s strong earnings outlook against the risks of a higher valuation premium.

Bottom Line

AppLovin’s recent stock rebound, robust earnings growth, and strategic pivot towards a high-margin ad-tech model point to its long-term potential. However, caution is warranted due to downward earnings revisions and a higher-than-industry-average valuation. While the company’s financial performance remains strong, the elevated forward P/E ratio indicates limited room for error. For now, investors may consider holding APP stock, leveraging growth initiatives while remaining aware of valuation risks. Ongoing monitoring of future earnings reports and analyst revisions will be crucial for reassessing investment positions, adopting a hold strategy that balances optimism with caution.

APP currently holds a Zacks Rank #3 (Hold).