APP Stock Sinks 22% Over 3 Months: Is This a Buy-the-Dip Moment?

AppLovin Corporation APP has witnessed its stock fall 22% over the past three months, slightly worse than the industry’s overall 18% decline. Notably, competitors in the in-game mobile advertising space have also struggled. Alphabet Inc. GOOGL shares have dropped 18%, while Meta Platforms META has seen a 19% decrease during the same period.

Encouragingly, APP has rebounded 8% in the last month, hinting at a possible recovery. Given that industry giants like Alphabet and Meta Platforms are navigating similar headwinds, APP’s performance appears consistent with sector trends.

This analysis will explore whether APP’s current valuation, like Alphabet and Meta Platforms, presents an attractive opportunity for investors.

APP’s Strategic Shift Toward a High-Margin Business Model

AppLovin is actively transforming into a pure-play advertising platform, sharpening its focus on high-growth, high-margin segments. A major milestone in this transition was the $900 million sale of its gaming unit to Tripledot Studios. This divestiture allows APP to concentrate on its ad technology, a move that aligns with its vision of serving the global digital advertising market, which includes over 10 million businesses. To capitalize on this vast market, the company is investing in automation, developing advanced tools to enhance customer efficiency and maximize ad performance.

Strong Financial Performance Underscores Growth Potential

AppLovin’s latest earnings report reinforces its strong financial health and growth trajectory. The company continues to benefit from its AXON 2.0 technology and strategic expansion within the gaming and in-app advertising sectors. In the fourth quarter of 2024, revenues surged 44% year over year and 14% sequentially, reflecting strong market demand. Adjusted EBITDA jumped 78% year over year and 17.5% sequentially, showcasing improved operational efficiency. Net income skyrocketed 248% from the prior year and 38% sequentially, demonstrating APP’s ability to translate revenue growth into significant profitability.

For the full year 2024, revenues climbed 43% year over year, while adjusted EBITDA surged 81%, underscoring AppLovin’s ability to seize market opportunities while maintaining efficiency. Looking ahead, management has guided for $1.4 billion in the first quarter of 2025 sales, slightly above the Zacks Consensus Estimate of $1.37 billion. Historically, AppLovin has consistently beaten earnings expectations, increasing the likelihood of another outperformance.

Analysts Project APP’s Robust Earnings Expansion

Analysts are forecasting strong earnings growth. The Zacks Consensus Estimate for first-quarter 2025 earnings is $1.45 per share, representing an impressive 116.4% increase from the prior-year quarter. Moreover, earnings for the full years 2025 and 2026 are expected to grow by 47.5% and 38.5%, respectively, compared to the previous years. These projections suggest that despite the recent stock weakness, APP’s long-term earnings outlook remains very promising.

Downward Revisions Signal Some Caution

Over the past 60 days, analysts have become slightly less optimistic about AppLovin’s future earnings. Three estimates each for 2025 and 2026 have been revised downward, while no analysts have raised their forecasts. As a result, the Zacks Consensus Estimate for 2025 earnings has decreased by 2.8%, and the 2026 estimate has declined by 1.8% over the same time frame. This trend suggests that while strong growth is still projected, some analysts are adjusting expectations. Investors should monitor whether these downward revisions continue or stabilize moving forward.

Valuation Points to Potential Overpricing

APP currently trades at a forward 12-month price-to-earnings (P/E) ratio of 37.9, which is significantly higher than the industry average of 24.33. This means investors are paying a premium for APP’s future earnings compared to similar companies in the sector. A higher P/E can indicate strong growth expectations, but it may also suggest that the stock is overvalued relative to peers. If the company fails to meet these high expectations, the stock could face downward pressure. Therefore, investors should weigh the strong earnings outlook against the risks of paying a higher valuation premium.

Bottom Line

AppLovin’s recent rebound, strong earnings growth, and strategic shift toward a high-margin ad tech model highlight its long-term potential. However, caution is warranted due to recent downward earnings revisions and a valuation premium compared to industry peers. While financial performance remains robust, the elevated forward P/E ratio suggests limited room for error. Investors should hold APP stock for now, capitalizing on its growth initiatives while remaining mindful of valuation risks. Monitoring future earnings reports and analyst revisions will be key to reassessing the position. A hold strategy balances optimism with a prudent wait-and-watch approach.

APP currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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

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