AppLovin Stock Before Q2 Earnings: To Buy or Not to Buy?

AppLovin Corporation APP will report its second-quarter 2024 results on Aug 7, after the bell.

The Zacks Consensus Estimate for earnings in the to-be-reported quarter stands at 74 cents, indicating 236.4% growth from the year-ago reported quarter. The consensus estimate for revenues stands at $1.1 billion, indicating 43.8% year-over-year growth. There has been no change in analyst estimates or revisions in the past 30 days.

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The company has an impressive earnings surprise history. Earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, with an earnings surprise of 60.9% on average.

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A Beat in the Cards

Our proven model predicts a likely earnings beat for APP this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat.

APP has an Earnings ESP of +4.76% and a Zacks Rank #3.

All Round Healthy Business Should be the Driver in Q2

We expect that year-over-year improvement in the company's top line in the to-be-reported quarter will be driven by an increase in the Software Platform, as well as Apps revenues. The consensus estimate for the Software Platform revenues is pegged at $690.3 million, indicating 70% year-over-year growth. The consensus mark for Appsrevenuesis pegged at $372.6 million, indicating 8.3% year-over-year growth.

The consensus mark for Software Platform's adjusted EBITDA is pegged at $507.3 million, suggesting 86% year-over-year growth. App's adjusted EBITDA is expected to increase 6.8% year over year.

The Stock in a Correction Mode

APP has rallied a massive 72.5% year to date while plummeting 10.6% in the past three months and 20.8% in the past month. These price dynamics suggest that the stock is in a correction phase.

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APP's recent performance is in line with its competitors in the in-game mobile advertising space. Alphabet Inc. has declined 10.3%, and Meta Platforms has dipped 4.3% in the past month.

A steep dip lately has brought the stock into the undervalued zone. Based on training 12-month EV-to-EBITDA, APP is currently trading at 18.3X, way below the industry's 51.8X. If we look at the forward 12-month Price/Earnings ratio, APP shares are currently trading at 20.69X forward earnings, well above the industry's 32.3X.

Investment Risk and Rewards

APP has introduced its AXON 2.0 technology, expanded its gaming studios, and launched new initiatives to drive market growth and long-term expansion. These efforts have led to strong financial results, but certain risks remain. The company's in-game advertising growth may experience a slowdown in percentage growth rates. Further, it is unlikely that AppLovin will sustain the 91% software revenue growth seen in the first quarter, with flat revenue growth projected for the third quarter.

AXON's growth potential is uncertain and depends on the returns it generates for advertisers, which will improve if its algorithms are refined. Additionally, the success of APP's initiatives outside the gaming sector is unpredictable due to their early stage. APP aims to expand beyond gaming, forming partnerships with e-commerce platforms like Flip and acquiring Wurl, which offers performance marketing channels in the connected TV space but is still developing.

What You Should Do

AppLovin has demonstrated remarkable growth in the in-game mobile advertising space. The company's impressive technological advancements, such as AXON 2.0, and strategic expansions have translated into substantial financial gains, marking it as a strong contender in the market. While APP has strong potential, there are hurdles that the company may have to navigate to sustain its growth trajectory.

Investors must approach with caution due to potential risks, including the possibility of slowed growth in in-game advertising and the uncertain impact of APP's non-gaming initiatives. Since the stock has had a massive rally before getting into the current correction phase, potential investors should consider waiting as it may undergo a further correction.

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