Is AppLovin's Shares Worth Investing in Following a 12% Decrease?
Rewritten Article:
AppLovin's (NASDAQ: APP) shares took a hit following critical assessments from short sellers Culper Research and Fuzzy Panda. These analysts raised doubts about the legitimacy of the company's AXON, an AI-driven advertising search engine that has significantly contributed to AppLovin's impressive earnings in recent quarters. For more on AppLovin's latest financials, check out our post-earnings analysis, "AppLovin Stock's 850% Growth – What's Next".
Now, APP stock appears alluring yet volatile, making it a challenging investment decision at its current price of approximately $330. While there seem to be few reasons to be worried about APP stock, its sky-high valuation necessitates caution. Our analysis, considering the company's growth, profitability, financial stability, and downturn resilience, arrives at the following conclusions:
Is AppLovin's Valuation Justified?
On the face of it, APP stock appears to be overpriced when compared to the broader market.
- AppLovin's price-to-sales (P/S) ratio is approximately 29.0, against the S&P 500's 3.1
- Its P/operating income (P/EBIT) ratio is 81.1 compared to S&P 500's 24.4
- And, its P/earnings (P/E) ratio is 71.5 versus the benchmark's 24.4
Can AppLovin Maintain Its Rapid Revenue Growth?
AppLovin's revenue growth has been robust over the past years.
- The company has shown an average yearly growth of 36.6% towards its top line in the last 3 years, compared to the S&P 500's 9.8% growth
- Its annual revenues have surged 41.5% from $3.0 billion to $4.3 billion
- Furthermore, quarterly revenues have swelled 38.6% to $1.2 billion in the most recent quarter from $864 million a year ago
How Profitable is AppLovin?
AppLovin's profitability is commendable.
- The company's operating income over the last 4 quarters amounted to $1.5 billion, representing a high operating margin of 35.8% (vs. 12.6% for the S&P 500)
- Its operating cash flow (OCF) over this period was $1.7 billion, pointing to an impressive OCF-to-sales ratio of 40.6% (vs. 14.4% for S&P 500)
Does AppLovin Show Financial Stability?
AppLovin's financial strength is there for all to see.
- The company's debt figure stood at $3.5 billion at the end of the last quarter, with a market cap of $112 billion (as of 2/26/2025). This implies a very low debt-to-equity ratio of 2.8% (vs. 19.7% for S&P 500)
- The company's cash (inclusive of cash equivalents) makes up $568 million of its $5.4 billion in total assets. This equates to a moderate cash-to-assets ratio of 10.4% (vs. 14.1% for S&P 500)
How Resilient is APP Stock During Downturns?
APP stock has been less resilient than the S&P 500 during past market downturns. While investors are hoping for a soft economic landing, what would happen should another recession strike? Our analysis on "How Low Can Stocks Go During A Market Crash" provides insight into key stocks' performance during and after the past 6 market crashes.
Enrichment Data:
Valuation Comparison Summary:
| Metric | AppLovin | S&P 500 ||---------|----------|------------------------|| P/S Ratio | 29.0 | 1.5 - 2.5 || P/Operating Income (approx.) | High (EV/EBITDA: 48.57) | 10 - 15 (EV/EBITDA) || P/E Ratio | 91.59 (trailing), 63.33 (forward) | 15 - 25 |
AppLovin's valuation metrics on a price-to-sales (P/S), price-to-operating income (P/EBIT), and price-to-earnings (P/E) basis are substantially higher than those of the S&P 500. This indicates a higher risk due to AppLovin's elevated valuation multiples compared to the broader market.
- Despite the concerns raised by short sellers about AppLovin's AI-driven advertising search engine, AXON, the app's revenue has significantly contributed to its impressive earnings, leading to its current alluring yet volatile app stock valuation of approximately $330.
- In our analysis, we found that despite AppLovin's sky-high valuation, its app revenue growth has been robust, with an average yearly growth of 36.6% towards its top line in the last 3 years, surpassing the S&P 500's 9.8% growth.
- Including cash equivalents, AppLovin's cash makes up $568 million of its $5.4 billion in total assets, reflecting a commendable financial stability with a moderate cash-to-assets ratio of 10.4%, lower than the S&P 500's 14.1%.
- According to our analysis, during past market downturns, AppLovin's stock has been less resilient than the S&P 500, and understanding key stocks' performance during and after previous 6 market crashes, as outlined in the post-analysis piece "How Low Can Stocks Go During A Market Crash", could provide valuable insights into its potential performance during future economic downturns.
