AppLovin stock price analysis after earnings: buy the dip?

AppLovin stock price pulled back in the extended hours after the company published its second-quarter results. APP dropped by 5.53% to $370, down by nearly 30% from its highest point this year. So, is APP stock a good buy after earnings?

AppLovin earnings preview

AppLovin has grown into one of the biggest software companies globally with a market capitalization of over $132 billion.

The company offers numerous services, with its core one being app monetization through its MAX solution. This service enables developers to maximize ad revenue by optimizing ad placements using real-time auctions.

AppLovin also uses its proprietary AI solution known as AXON to match apps with users across most devices, such as mobile and connected TV.

The company also offers other services like analytics and measurements, creative optimization, and programmatic advertising.

In a statement on Wednesday, AppLovin said that its business continued growing in the second quarter. Its revenue surged by 77% to $1.258 billion. This growth brought its six-month revenue to $2.4 billion, up from $1.38 billion in the same period last year.

AppLovin, despite its criticism, has become a highly profitable company, with its net income jumping to $819 million, up from $309 million in Q2’24.

Its six-month net profit rose from $546 million to $1.39 billion. These numbers mean that the company has a net income margin of a whopping 65%.

The management expects that the company’s growth trajectory will continue. It now expects that its annual growth rate will be between 20% and 30% as it ramps its AXON platform globally.

AppLovin’s balance sheet also improved substantially during the quarter. It ended the second quarter with over $1.19 billion in cash and equivalents, up sharply from $697 million last year. Most of this cash came from its operations, and possibly its $400 million Tripledot.

Guidance and valuation

Analysts expect the company’s growth to continue this year. The average estimate among analysts is that its Q3 sales will be $1.33 billion, up by 10.85% from a year earlier. The slow growth will likely be because of the Tripledot sale.

According to Yahoo Finance, the average revenue estimate for the year is $5.6 billion, a 20% increase from 2024. These analysts see the company’s revenue hitting $6.8 billion next year.

A key concern among investors is that the company’s business is overvalued because it has a forward P/E ratio of 46, which is higher than the sector median of 29.

However, a closer look at the Rule of 40 shows that the company is actually cheap. Data shows that the average future annual revenue growth rate is about 20%, while the net income margin is 37%. These numbers mean that it has a multiple of 57, making it a cheap stock.