AppLovin (APP) Stock: Is a Correction Phase Brewing Before Q2 Earnings?
AppLovin Corporation (APP) is gearing up to release its second-quarter 2024 earnings on August 7th, after the market close. Analysts are expecting strong growth, with the Zacks Consensus Estimate projecting earnings of 74 cents, a 236.4% increase year-over-year. Revenue expectations are equally upbeat, with a consensus estimate of $1.1 billion, signifying a 43.8% year-over-year jump. However, the stock has recently entered a correction phase, shedding over 20% in the past month, leaving investors wondering about the future trajectory of APP.
Key Takeaways:
- Strong Earnings Estimates: Analysts anticipate robust growth for the second quarter, fueled by expansion in both the Software Platform and Apps segments.
- Positive Earnings Surprise History: AppLovin consistently surpassed earnings expectations in the past four quarters, with an average earnings surprise of 60.9%.
- Correction Phase: Despite the strong earnings outlook, APP has experienced a significant drop in recent months, potentially signaling a correction phase.
- Valuations: While the stock is currently undervalued based on some metrics, like EV/EBITDA, other metrics like forward P/E suggest it may be relatively expensive.
- Growth Potential and Risks: AppLovin is leveraging various growth initiatives, including its AXON 2.0 technology, studio expansions, and venturing beyond gaming. However, the company faces challenges in sustaining high growth rates and uncertainties surrounding its non-gaming ventures.
A Deeper Dive into the Numbers
The consensus estimate for Software Platform revenue sits at $690.3 million, indicating a substantial 70% year-over-year increase. Apps revenue is expected to rise by 8.3% year-over-year to $372.6 million. Similarly, adjusted EBITDA is projected to witness significant growth, with the Software Platform expected to see a 86% surge year-over-year and App’s adjusted EBITDA forecasted to rise by 6.8%.
AppLovin’s Recent Performance and Valuation
Despite the positive earnings expectations, AppLovin’s stock has faced a downward trend in recent months. The stock has rallied a considerable 72.5% year-to-date but has plummeted 10.6% in the past three months and 20.8% in the past month, indicating a correction phase. This downturn aligns with the broader in-game mobile advertising segment, with companies like Alphabet Inc. and Meta Platforms facing similar downward pressures.
This recent dip has pushed APP into undervalued territory, with its trailing 12-month EV-to-EBITDA currently at 18.3X, significantly lower than the industry average of 51.8X. However, the forward 12-month Price/Earnings ratio suggests a different story, with APP shares trading at 20.69X forward earnings, exceeding the industry average of 32.3X.
Growth Initiatives and Uncertainties
AppLovin has been proactive in pursuing growth initiatives, including the launch of AXON 2.0, a technology aimed at improving returns for advertisers through refined algorithms. The company has also expanded its gaming studios and ventured into new markets, such as e-commerce through partnerships with platforms like Flipkart. The acquisition of Wurl, a performance marketing platform in the connected TV space, also reflects AppLovin’s ambition to diversify beyond gaming.
While these initiatives hold promise, the success of AXON 2.0 is dependent on its ability to generate compelling returns for advertisers. Additionally, the success of AppLovin’s expansion beyond gaming remains uncertain, especially given the early stages of these ventures. Moreover, the company acknowledges that the rapid growth rate seen in in-game advertising may slow down in the future.
What This Means for Investors
AppLovin’s track record of exceeding earnings expectations and its strong position in the in-game mobile advertising space make it an attractive prospect. However, investors should be cognizant of potential risks, including the possibility of slower in-game advertising growth and the uncertain impact of non-gaming initiatives.
Given the recent correction phase, potential investors may want to consider waiting before making any investment decisions. The stock may potentially undergo further correction as market sentiment fluctuates. A careful assessment of the risks and rewards associated with APP is crucial for informed investment decisions.
In conclusion, AppLovin presents a compelling investment opportunity fueled by its strong performance and innovative initiatives. However, investors need to navigate the current correction phase and carefully evaluate the potential risks before making any investment decisions.
