AppLovin Corporation (APP), which creates software-based platforms for mobile app developers, made its U.S. stock market debut on Nasdaq on April 15 with an approximately $2 billion offing. But the company’s shares have since declined by as much as 12.2%. Indeed, according to a Bloomberg report, APP is the worst performing IPO of its size. It is currently trading at $53.46, which is well below its $80 IPO price.

The company’s mobile app ecosystem positions it for long-term growth due to smartphones’ increasing market penetration and the growing popularity of mobile gaming.

However, near-term headwinds related to Identification for Advertisers or IDFA—Apple, Inc.’s (AAPL) unique code linked to each device that requires users to give explicit permission to sharing data with apps—could hurt the company’s advertising business and reduce in-app purchases. Here is what we think could influence APP’s performance in the near term:

Click here to check out our Software Industry Report for 2021

Industry Tailwinds

Since last year, there has been a dramatic spike in demand for certain mobile app categories that are helping people to adapt and cope with the new normal. With more companies investing heavily in the development of these apps to increase capacity and introduce new features,  mobile app consumption is likely to grow more rapidly in the next few years. This should benefit mobile app development platforms like APP. In fact, with more millennials preferring mobile gaming over gaming on PCs and other devices, the company’s gaming apps and studios should see a substantial growth in their user base.

Headwinds in Advertising Business

APP’s gaming studios business and  app developing business are heavily dependent on ads and in-app purchases. Both of its businesses generate a significant part of their  revenues from advertising. However, AAPL’s recent iOS 14 iPhone software update, which allows users to opt out of data tracking features for apps, could negatively impact the company’s advertising revenue. Since app developers like APP use IDFA to help target users with ads across different devices, this change could diminish the company’s in-app purchases and throttle its growth prospects.

Mixed Profitability

The company’s 61.7% trailing-12-month gross profit margin is 28% higher than the 48.2% industry average. Its 32.5% levered free cash flow margin is 158.8% higher than the 12.6% industry average. However, APP’s return on total capital and EBIT margin of 1% and 1.4%, respectively, are 76.8% and 82.8% lower than the  industry averages. Moreover, its 0.2% CAPEX/Sales  are 90.4% lower than the 2.3% industry average.

Stretched Valuation

In terms of trailing-12-month EV/EBIT, APP is currently trading at 1,049.81x, which is significantly higher than the 26.50x industry average. The stock’s 14.92  trailing-12-month EV/sales ratio  is 236.5% higher than the 4.43 industry average. Also, its 89.3 trailing-12-month Price/Cash Flow multiple is 288.5% higher than the 22.94 industry average.

POWR Ratings Reflect Uncertainty

APP has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. APP has a C grade for Quality. This justifies the stock’s mixed profitability. It also has a C grade for Stability.

Moreover, the company has a D Value grade, which is reflective of its premium valuation.

In addition to the grades we’ve highlighted, one can check out additional APP ratings for Sentiment, Growth and Momentum here. APP is ranked #67 of 125 stocks in the D-rated Software – Application industry.

Click here to view the top-rated stocks in the Software – Application industry.

Bottom Line

Although APP’s business could benefit from the rapidly growing mobile app ecosystem in the long run, the near-term signs of recovery are still blurry for the company. The stock is trading 25.2% below its $71.51 high. Furthermore, the headwinds in its advertising business and its sky-high valuation could limit its upside potential. So, we think investors should wait for better entry points in this IPO stock. 

Click here to check out our Software Industry Report for 2021

APP shares were trading at $51.34 per share on Wednesday morning, down $2.12 (-3.97%). Year-to-date, APP has declined -21.26%, versus a 9.98% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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