Buy the Spike in AppLovin Stock after Q2 earnings?

AppLovin APP continued its growing popularity as one of the market’s top momentum stocks after exceeding its Q2 expectations on Wednesday evening.

The marketing and technology provider for apps has seen its stock spike as much as +16% in today’s trading session to over $400 a share, sitting on staggering gains of nearly +1000% in the last three years.

Blowing away the returns of the broader indexes, it’s certainly a worthy topic of whether investors should chase the post-earnings rally in AppLovin’s stock.

AppLovin’s Strong Q2 Results

Driven by continued strength in gaming advertising, AppLovin’s Q2 sales rose 16% year over year to $1.25 billion and beat estimates of $1.21 billion by 4%. Furthermore, this marked AppLovin’s sixth consecutive quarter of more than $1 billion in sales.

More impressive, Q2 earnings soared 154% from $0.89 a share in the prior period to $2.26, eclipsing EPS expectations of $1.99 by 13%. Also illustrated in the price performance chart above, AppLovin has now exceeded the Zacks EPS Consensus for nine consecutive quarters, with an average earnings surprise of 22.36% over the last four quarters as shown below. 

AppLovin’s Favorable Guidance

Fueling AppLovin’s post-earnings rally, the technology services leader provided favorable guidance for the third quarter, expecting Q3 sales between $1.32-$1.34 billion and above the current Zacks Consensus of $1.31 billion or 9% growth (Current Qtr below).

Additionally, AppLovin forecasts Q3 adjusted EBITDA at $1.07-$1.09 billion on an 81% margin, with the company stating these targets position it to continue driving strong growth and value for its partners and shareholders.

APP Technical Analysis & Valuation Comparison

To the delight of technical traders, AppLovin stock recently surged past its 50-day simple moving average (SMA), which is now at $365 as depicted by the green line below, and signals short-term strength. Falling below this price point but staying above its 200-day SMA (Red Line) of $331 may be of optimal interest for those looking to buy on the dip. 

This buy-the-dip scenario may appeal to fundamental investors as well, as APP currently trades at 46.5X forward earnings, a noticeable but not overly stretched premium to the benchmark S&P 500’s 24.2X and its Zacks Technology Services Industry average of 21X.  

In terms of price-to-forward-sales, APP does trade at a high premium of 24.8X compared to the S&P 500’s 5.4X and the industry average of 2.1X.

Bottom Line

AppLovin stock currently lands a Zacks Rank #3 (Hold). The company's expansion does suggest it will continue to grow into its somewhat lofty valuation, but more upside from here will likely depend on what is hopefully a very positive trend of earnings estimate revisions (EPS) following its favorable Q2 report and guidance. For now, there could be better buying opportunities ahead that will be more reassuring to long-term investors.

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This article originally published on Zacks Investment Research (zacks.com).

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