AppLovin Dominates the Digital Economy Despite Bearish Trends

Key Points

• After a recent accusation of fraudulent clicks and downloads, shares of AppLovin have traded down, offering investors a potential buy opportunity that could be exploited today.
• Wall Street analysts have dismissed the short report and reiterated double-digit upside in their targets.
• Buyers have aggressively entered the stock just after its dip lower, offering support. 

When the market starts to get choppy and blurry, as it is right now, as seen in the recent swings in the S&P 500, investors can greatly benefit from digging into the biggest and most defined trends in the macro image for the market since some of the volatility might not even get into those areas or at least be significantly compressed due to high conviction views.

This is the case with the way the global economy is headed, which is digital and online, as relatively every aspect of a business is now being implemented through artificial intelligence, and new platforms are spurring up left and right. With this in mind, the technology sector will be a key area to follow in the coming years as this theme develops further, but not all technology stocks are made equal.

This is where platforms like AppLovin Co. NASDAQ: APP come into play within this theme; as a service focused on building software-based platforms and solutions catered to what businesses need to develop, this stock is exposed to a lot more upside than its recent price action might suggest to the broader market. There are fundamental reasons present today to back this belief.

Today’s Pullback in AppLovin Stock Is an Opportunity in Disguise

While everyone else panics as the S&P 500 sold off last week, dragging other names in artificial intelligence and technology down, like NVIDIA Co. NASDAQ: NVDA, savvy investors will start to take advantage of this panic and lock in a potentially profitable buy opportunity for themselves.

So, at only 62% of its 52-week high, the stock represents a potential buying opportunity for investors as a whole, one that might have already priced in all the worst-case scenarios in the company’s future, leaving investors with nothing but upside instead.

However, the reason why the stock pulled back in the first place should be considered. A short report on the company, accusing it of reporting fraudulent clicks and downloads to boost its key performance indicators (KPIs), has been dismissed by a couple of Wall Street analysts who decided to remain bullish on AppLovin stock.

The reason is that, even if these allegations were true, there would be no real reflection in so-called “fake” clicks and downloads in realized revenue or free cash flow in the company’s financials. Because of this view, analysts from Wells Fargo decided to not only reiterate their Overweight rating on the stock but also boost its valuation.

A boost up to $538 per share would imply a new 52-week high on the stock, which might end up attracting a lot more momentum buyers who tend to look for such breakouts, and also calls for an implied rally of as much as 65% from where the stock trades today.

No Real Bearish Traction For AppLovin Today

Judging by how quickly these analysts dismissed the short report allegations, investors shouldn’t be surprised to see the company’s short interest decline by as much as 12.1% over the past month alone. This is a clear sign of bearish capitulation and an opening for further upside moves in the name.

More than that, markets today are willing to overpay for the stock, as can be seen through its valuation multiples. Taking the price-to-earnings (P/E) ratio, for example, investors can see that a 70.6x valuation multiple is high in itself and calls for a steep premium compared to the computer sector’s 60.2x average P/E.

While most investors would be wary of even considering a buy in a stock that’s “Expensive,” seasoned professionals would point out that the market will always be ready to pay a premium for stocks that it believes have the potential to outperform peers and the broader market.

That being said, investors can still consider whether these short accusations have any further weight on the stock and whether the selloff that came as a result is justified. However, even after all of the bullish factors explained for AppLovin, there is one that could trump any remaining doubts.

That is the fact that AppLovin stock quickly stopped its sharp decline, receiving a wave of reactive buyers around the $289 to $300 per share area, and has failed to retest it since. Without needing to break down the why or how all investors need to know is that there is a reason someone decided to bet big and bet late at the right price.