AppLovin Corporation (APP) creates software-based platforms for mobile app developers to strengthen the monetization of their apps globally. It also has a portfolio of mobile games. The nine-year-old, Palo Alto, Cal., company made its stock market debut on April 15, raising approximately $2 billion. While the stock closed its first trading session down more than 18%, it has gained as much as 25% since. The stock is currently trading 9.5% below its all-time high of $90.03, which it hit on June 18.

APP’s strategic acquisitions of app measurement leader Adjust and top grossing games that include West Game and Cash Tornado Slots, as well as the company’s solid mobile app ecosystem, position APP for long-term growth. However, the company’s revenues have not yet been translated into profits. Moreover, it has generated substantial losses in the first quarter of 2021.

Since it is still unclear whether the company can deliver sustainable earnings and revenue growth, the stock’s near-term prospects look uncertain.

Click here to check out our Software Industry Report for 2021

Here is what we think could influence APP’s performance in the near term:

Strategic Acquisitions

In April, APP completed the  acquisition of leading mobile app measurement and marketing company Adjust. This move should  enhance APP’s SaaS mobile marketing solutions for mobile app developers and boost its ability to address an  increasing market opportunity. Since Adjust’s app solutions align with APP’s growth strategy, the acquisition could bolster the company’s user base and sales going forward. In fact, the acquisition of the two new gaming brands–West Game and Cash Tornado Slots–should further strengthen the company’s content portfolio and drive sales in the long run.

Mixed Financials

During the first quarter ended March 31, 2021, APP’s revenue increased 132% year-over-year to $603.9, while the company’s organic growth in revenue was 89%. Its adjusted EBITDA totaled $131 million, representing a 110%  increase  from the year-ago value. However, the company’s income from operations declined 54.4% from the prior-year quarter to $11.47 million. Also,  its operating expenses rose 152% from their year-ago value to $592.41 million. APP reported a $10.58 million net loss , compared to $4.66 million in net income in the prior-year period. Its loss per share came in at $0.05, compared to EPS of $0.01 in the first quarter of 2020. APP’s total comprehensive loss amounted to $11.24 million over this period.

Low Profitability

The company’s 0.4% trailing-12-month EBIT margin is 95.2% lower than the 8% industry average. Its net income margin and ROA are negative 7.8% and 5.4%, respectively. Moreover, APP’s 1% return on total capital is 76.8% lower than the 4.4% industry average.

Consensus Price Target Indicates Potential Downside

Of the seven Wall Street analysts that have rated APP, three rated it Buy while one rated it Hold. Analysts expect the stock to hit $73.57 in the near term, indicating a 9.7% potential decline from its last closing price of $81.49. Their price targets range from a low of $64 to a high of $81.

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 Value. The company’s 101.61 forward non-GAAP P/E ratio, which is 290.7% higher than the 26.01 industry average, justifies the grade. It also has a C grade for Growth, reflective of its mixed financials.

APP has a C Stability Grade, indicating that it is more volatile than its peers.

Beyond the grades that we’ve highlighted, one can check out additional APP ratings for Quality, Sentiment, and Momentum here. APP is ranked #57 of 128 stocks in the D-rated Software – Application industry.

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

Bottom Line

Its  strategic acquisitions should  drive the sales of APP’s mobile gaming and app marketing services in the long run. But although the stock has surged 25% since its market debut in April, it has not been able to translate its revenue growth to  profits. So, we think investors should wait until APP shows some more stability in its financials before investing in its stock.

Click here to check out our Software Industry Report for 2021

APP shares rose $5.26 (+6.45%) in premarket trading Thursday. Year-to-date, APP has gained 33.05%, versus a 14.28% 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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