AppLovin stock: APP may have a 30% dip after earnings
AppLovin stock price is firing on all cylinders this year, making it one of the best-performing companies in Wall Street. It has soared by over 314% in 2023, bringing its market cap to over $53 billion.
AppLovin has been growing
APP’s surge will be put to the test on Wednesday when the company publishes its financial results. These numbers will provide more information about its performance and whether it has more upside going on.
For starters, AppLovin is a technology company that provides software and artificial intelligence solutions for companies seeking to gain more customers.
Its software is made up of several tools, including AppDiscovery, MAX, Adjust, and Wurl. Its AppDiscovery solution is powered by AXON, which matches advertiser demand and publisher supply.
MAX is its monetization solution, while Adjust is its measurement and analytics marketing platform. Also, Wurl is its connected TV advertising solution.
As a result, AppLovin is not a household name since it offers its solutions to companies and advertising agencies.
AppLovin’s business has been growing at a rapid pace in the past few years, which explains why its stock has surged. Revenue jumped from $994 million in 2019 to $3.2 billion in the last financial year.
Most importantly, it has now become profitable, with its profit in the last twelve months soaring to $827 million.
Read more: Are there more gains ahead for AppLovin?
APP earnings ahead
The next important catalyst for the APP stock price will be its third-quarter earnings. The most recent results showed that AppLovin’s revenue jumped by 44% to $1.08 billion in the second quarter.
This revenue was driven by its core software division, whose figure rose by 75% to $711 million. The apps segment grew by 7% to $369 million.
AppLovin continued its profitability trend, with the net income jumping to $310 million and free cash flow being $455 million.
Analysts believe that AppLovin’s business continued doing well in the third quarter, with its revenue expected to grow by 30% to $1.13 billion. They also see its fourth-quarter revenue guidance being $1.18 billion, representing a 23.8% increase.
AppLovin is also expected to be more profitable, with the earnings per share seen coming in at $0.92, higher than last year’s $0.3.
The key concern for AppLovin stock is that it has become severely overvalued since its valuation stands at over $54 billion. This valuation is 12.2x the estimated revenue for this year, which is a significant stretch.
AppLovin also trades at a forward price-to-earnings ratio of 46, which is a big number since the sector median is 28.9.
However, some analysts believe that the company is not overvalued based on the rule of 40 metric, which looks at the revenue growth and profit margin. In its case, it has a forward revenue growth figure of 22.47 and a profit margin of 20.9, giving it a figure of 43.
The challenge, however, is that analysts expect that AppLovin’s revenue growth will start to moderate. Its revenue growth for this year will be 35.3% followed by 16.5% in 2025.
The average AppLovin stock price forecast by analysts is $145, lower than the current $164. In a recent upgrade, analysts at Citi said that the APP stock price would jump to $160, which has happened.
AppLovin stock price analysis
The daily chart above explains why the APP shares have gone parabolic. It formed a cup and handle pattern whose upper side was $115.75. In most periods, this is one of the most bullish patterns in the market.
AppLovin shares have remained above the 50-day and 100-day weighted moving averages (WMA). The two lines of the MACD indicator have formed a bearish crossover, while the Relative Strength Index (RSI) has pointed downwards.
Therefore, my concern with AppLovin is that its stock has gone up too quickly. As such, I suspect that it will do a retest pattern by moving to the key support at $115.75 and then resume the bullish trend. If this happens, it means that it may drop by 30% from the current level.
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