The Bottom Is In For AppLovin; Reversal Is Next

Key Points

• AppLovin had a mixed quarter, but results show a meaningful improvement in operations. 
• Analysts have begun to raise their targets and put a bottom in the stock. 
• Institutions are buying this name and may help drive it higher in 2023. 

Shares of AppLovin NYSE: APP have finally bottomed. After correcting more than 90%, the stock price, valuation and outlook have aligned in a way that will be meaningful to investors. The company operates a software-based platform for app developers to market and monetize their work, so there is demand. The company’s Q1 results are mixed but left the analysts loving the potential for gain. The stock is still rated at Hold, and the price target is trending lower than last year, but the post-release activity has the consensus target firming.

That alone will not drive a reversal in the stock, but it provides a base of support, and there are some other catalysts and drivers to push it higher. 

Regarding the analysts, at least 5 have come out with commentary following the Q1 release. All include a price target increase with an implied consensus of $22.50. That’s slightly below the broader consensus reported by Marketbeat but is a step in the right direction. The institutions are also buying this stock and have been ramping up their activity over the past few quarters.

The group owns about 38% of the company and may be expected to increase its holdings now that the Apps portfolio is complete. The company’s next phase will focus on upgrading the machine learning AXON technology, expanding ad solutions into connected TV, and expanding marketing targets to include OEMs and carriers, all expected to drive top and bottom-line results. 

AppLovin Moves Up Mixed Results, Improved Guidance 

AppLovin had a mixed quarter relative to the analysts' expectations, but the details are suitable for investors nonetheless. The company reported $715 million in net revenue for a gain of 14.3% compared to last year and beat the analysts’ consensus by 300 basis points. The strength was driven by a 199% increase in Software Platform revenue (up 8% adjusted) which grew to 50% of the net.

The Apps platform is down 29% YOY, which was expected due to optimization. The takeaway is that non-recurring publisher bonuses are off the books, and margins have improved significantly. 

The margin news is where the details are mixed, but the takeaway is positive for shareholder value. The company reported a GAAP loss of $0.01, which missed consensus by $0.07 but improved from -$0.31 in the prior year. The offsetting factors are that operating costs improved despite increased R&D spending, and the company is on track for GAAP profits. 

The GAAP loss is due to increased interest expenses that may weigh on price action but also because of non-cash impairments. The cash from ops came in at $289 million, with $283 of that free cash flow. This allowed the repurchase of shares and the reduction of long-term debt. 

AppLovin repurchased $202 million of stock this quarter and has $210 million left. That’s worth about 2.6% of the market cap but is offset by stock-based compensation. The company paid about $83,000 in stock for the quarter.

The Technical Outlook: AppLovin Is In Reversal 

Shares of AppLovin moved above the 150-day moving average following the Q1 report, and it looks like they will continue higher. The next target for resistance is near $27, a move above which could take the stock up to the $40 range. If not, this market may be rangebound at current levels until later in the year.