AppLovin Shares Slump Amid Overvaluation Concerns Despite Revenue Surge

Shares of AppLovin have experienced a significant decline recently, with a drop of 3.26% observed, extending a three-day losing streak that amounts to a 10.27% decrease. The broader Nasdaq 100 index also saw declines during this period, marking broader pressures across tech-focused stocks.

AppLovin operates an application platform that empowers advertisers and publishers to enhance their marketing, monetization, and app development through services like AppLovinDiscovery, MAX, and Adjust. Founded in 2011, the company also offers free mobile games, serving a customer base that spans from independent developers to enterprises across mobile and connected TV platforms.

Despite strong momentum, AppLovin's stock is perceived by some analysts to be overvalued. This assessment is based on current forecasts of its earnings growth rates over the next two to four years, which some consider optimistic. The company's recent performance indicates a robust third quarter, with revenue reaching $1.2 billion—an uptick of 39% compared to the previous quarter. Adjusted EBITDA surged by 72% to $722 million, showcasing impressive margins and a significant increase in free cash flow.

The primary driver of this growth stems from AppLovin's software platform business segment, which showed a 66% increase in revenue, reaching $835 million. In contrast, the app segment showed stagnation, with minimal growth. The software platform's success is largely attributed to the AXON algorithm, which has significantly benefited game advertisers, fostering revenue growth.

However, recent gains in the software platform were partially supported by non-recurring advantages such as a favorable Google Cloud contract renewal and exchange rate tailwinds. These factors might not persist in future quarters, as management anticipates slight declines due to increased data center capacity and PSU costs.

Looking ahead, analysts predict a moderation in growth rates for fiscal 2025, with expectations that earnings per share growth will decelerate. Even with projected strong growth figures, AppLovin remains one of the more expensive stocks among its peers based on forward-looking PEG ratios, suggesting limited upside unless the company significantly exceeds current optimistic assumptions.

In summary, while AppLovin's recent business acceleration, driven by AI, offers it a position to capitalize on broader market trends, the current valuation appears challenged. The stock may offer upside only if the company surpasses consensus expectations by a considerable margin, recognizing that its profit margin expansion is nearing its peak. The landscape in 2025 will likely differ from that of 2024, as the company navigates these headwinds and growth decelerations.