My one-year-old daughter still has AppLovin (APP) stock in her name, locked up in her Junior ISA, and awaiting her 18th birthday. Currently, she’s up 1,170%, as the stock has been a massive winner. However, as the responsible adult, I sold my own batch of shares a few months ago, and I’m still bearish despite the additional share price momentum. It may also be time to sell some of my daughter’s holdings. Selling my shares too early may have cost me a fair chunk of change. However, the savings I will accrue from jumping off the APP gravy train are priceless.
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Selling when I did may have been too early, but at least it’s better than selling too late. At today’s prices, I simply can’t justify APP’s sprawling valuation. The stock is trading at a considerable premium to its five-year average, and despite impressive forecasted growth, the market-topping earnings ratios are translating into solid performance results.
AppLovin’s sky-high valuation raises red flags. A P/E ratio 165% above the sector median at 112.3 suggests significant execution risk and potential overvaluation.
Another Earnings Beat and AppLovin Surged
AppLovin is a leading mobile app technology company. Its once-underperforming stock has experienced a meteoric rise since the launch of its upgraded advertising search engine, AXON 2.0, in 2023. The company’s platform helps developers market, monetize, analyze, and publish their apps, focusing on the gaming industry.
AppLovin’s recent earnings report for Q4 2024 has sent shockwaves through the market, with the company’s stock surging over 24% last week – the first day of trading following the results. The company reported adjusted earnings per share of $1.73, significantly outperforming the consensus estimate of $1.26. Revenue for the quarter reached $1.37 billion, a 44% increase from the previous year and well above the expected $1.26 billion.
The company’s advertising revenue skyrocketed by 73%, approaching $1 billion for the quarter. This remarkable growth can be attributed to the success of AXON 2.0, which has enhanced the placement of targeted advertisements across AppLovin’s gaming applications and partner studios.
Looking ahead, AppLovin projects first-quarter 2025 revenue between $1.36 billion and $1.39 billion, surpassing analyst estimates. The company’s management emphasized that they are still in the early stages of refining their AI capabilities, suggesting potential for further growth.
AppLovin’s New Focus Fuels Investor Interest
AppLovin’s success has been nothing short of extraordinary. It has been the top-performing technology stock in the U.S. over the past year. This phenomenal growth trajectory has positioned AppLovin as a dominant force in the AI-driven advertising market, with strong revenues locked in for several years to come.
The company’s announcement that it will deliver a strategic pivot towards AI-powered advertising and e-commerce also appears to fuel the bull run. Moreover, its decision to divest its gaming app segment marks a significant shift in focus, aligning with its core AI and ad tech strengths.
CEO Adam Foroughi emphasized this transformation: “Seven years ago, we began acquiring gaming studios to help train our earliest machine learning models, an invaluable step in shaping the AI that underpins our AXON platform. However, we’ve never been a game developer at heart.”
This move allows AppLovin to concentrate on expanding its AXON platform, which has shown remarkable success in optimizing ad targeting across various industries, including e-commerce. The company’s AI-driven approach has already captured a significant market share in holiday shopping ad spend, validating its effectiveness beyond gaming.
AppLovin Share Prices Have Teeth
Despite the impressive earnings growth and a potentially dominant role in e-commerce, AppLovin’s valuation leaves little room for error. The company’s price-to-earnings (P/E) ratio of 112.3 is significantly higher than the sector median of 25.5x while also being 150% above AppLovin’s 5-year average, indicating a substantial departure from historical norms.
Looking forward, a forward P/E ratio of 51.6x indicates a 104.7% premium to the sector median, suggesting that even with projected earnings growth, the stock remains pricey. The GAAP P/E ratios paint an even more extreme picture, with the TTM figure at 115x, a staggering 251.9% above the sector median.
While AppLovin’s price-to-earnings-to-growth (PEG) Non-GAAP (FWD) ratio of 1.3 is more favorable, indicating that the high valuation is somewhat justified by expected growth, it’s essential to consider the execution risks associated with maintaining such rapid expansion. The company’s projected P/E ratios show a declining trend from 74.7x in 2025 to 37.6x in 2027, which suggests that significant earnings growth is already priced into the stock
Is AppLovin (APP) Stock a Buy?
On Wall Street, APP stock carries a Strong Buy consensus rating based on 14 Buy, four Hold, and zero Sell ratings over the past three months. APP’s average price target of $512.53 per share implies approximately 9% upside potential over the next twelve months.
AppLovin: A Great Company, But an Overpriced Stock
AppLovin is an outstanding company with strong growth and a game-changing AI strategy. However, its current valuation seems overextended, with high P/E ratios that leave little room for error. While the company has executed flawlessly, the stock price already factors in substantial future growth. Selling could be premature, but at this valuation, the fundamentals don’t support the premium. Great company, overpriced stock—for now, I remain bearish.
