Is AppLovin (APP) A Bargain On Q2 Miss And Analyst Downgrade?

AppLovin (APP) is in focus after its latest quarterly report and a follow up analyst downgrade shifted attention to execution risk and long term growth assumptions instead of recent earnings strength.

See our latest analysis for AppLovin.

Over the past year AppLovin has shifted from very strong long term total shareholder returns to weaker recent share price momentum. The stock has fallen 16.5% over the past week and 33.1% over the past month after Q2 results and the analyst downgrade, even though the 3 year total shareholder return is roughly 7x and the 5 year total shareholder return is more than 5x.

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The recent slide in AppLovin, set against a last close of $339 and an average analyst target near $560, leaves a wide gap between market price and external estimates. Where does a reasonable view of fair value sit now?

Most Popular Narrative: 45.8% Undervalued

According to the most followed narrative on AppLovin, a fair value of $625 sits well above the recent $339 close. This frames the current valuation debate.

Rather than relying on the SWS DCF model, here is a first-principles earnings bridge. TTM earnings stand at US$3.91 billion. At analyst consensus growth of 21% per year, that reaches US$10.2 billion by 2031. Applying a 25x P/E, appropriate for a high-margin software compounder that is past peak hypergrowth, implies a US$255 billion market cap. Discounted back five years at 12% (reflecting the 148% debt-to-equity ratio and 2.37 beta), the base case intrinsic value is approximately US$625 per share, representing 27% upside from today.

Read the complete narrative.

Want to see how that earnings bridge really works for AppLovin? The narrative leans on rapid profit compounding, very high margins and a premium earnings multiple. Curious which specific growth and profitability assumptions are doing the heavy lifting in that $625 figure? The full narrative lays out the exact moving parts and timelines that support this fair value call.

Result: Fair Value of $625 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, AppLovin’s high debt load and the possibility that AXON’s e-commerce rollout underwhelms could quickly challenge the bullish fair value narrative.

Find out about the key risks to this AppLovin narrative.

Another View On AppLovin’s Valuation

That $625 narrative fair value uses an earnings bridge and a premium P/E. Our SWS DCF model offers a different reference point. It indicates a fair value of $792.44 per share, which also classifies AppLovin as undervalued. Which set of assumptions do you find more realistic for the next few years?

Look into how the SWS DCF model arrives at its fair value.

Next Steps

With sentiment on AppLovin clearly mixed, it helps to move quickly, check the underlying data, and decide where you stand on its balance of risks and rewards. You can start by reviewing the 3 key rewards and 1 important warning sign

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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