On Wednesday, BofA Securities adjusted its outlook for AppLovin Corp (NASDAQ:APP) shares, increasing the company's price target to $120 from the previous $100 while maintaining a Buy rating. The adjustment follows a meeting with the CEO and CFO of AppLovin in New York City, where the firm reaffirmed its confidence in the company as a top pick.
The basis for the positive stance on AppLovin, according to the investment firm, lies in the expectation that the company's Software segment will sustain high growth rates, exceeding 20% year-over-year, through calendar year 2026. This growth is anticipated within the context of a mobile gaming end market that is currently expanding at a 5% to 10% annual rate.
The firm projects that AppLovin will be able to generate almost all net new in-app purchase (IAP) revenue for advertisers in 2024, despite only capturing a third of the overall advertising spend, as estimated by BofA Securities.
The challenge of selecting the most appropriate mobile game to advertise from thousands of options is significant, especially given the global mobile gamer population of 3 billion. Current performance metrics indicate that mobile ad networks yield approximately 3 installs per 1000 impressions, a figure that BofA Securities considers low. Even a slight optimization in this area—achieving 2 additional installs for a total of 5 per 1000 impressions—could significantly impact the growth of the industry.
Since the first quarter of 2023, AppLovin's AI Engine has shown its capability to improve install rates, which has led to a 112% growth in the company's quarterly run rate. BofA Securities highlighted that data collection alone has the potential to increase install rates for many years, given the novelty of AppLovin's large language models (LLMs) and the possibility of further enhancements to the models.
In other recent news, AppLovin Corporation posted robust Q2 financial results, with revenue surging by 44% to reach $1.08 billion. The adjusted EBITDA also saw a significant increase of 80% to $601 million. The company provided future guidance, projecting Q3 revenue between $1.115 billion and $1.135 billion, and adjusted EBITDA ranging from $630 million to $650 million.
Benchmark adjusted its financial outlook for AppLovin, raising the price target to $66 from the previous $48, while maintaining a sell rating. The firm cited reduced revenue leverage and the impact of lower user acquisition spending in the App segment as reasons for this. They also anticipate AppLovin's investment in its e-commerce initiative will place unexpected pressure on margin expectations for 2025.
The firm also forecasts a deceleration in Software Platform gains driven by the MAX advertising platform through 2025. The lack of first-party data scale is seen as a significant disadvantage for the company in this new venture. Despite these challenges, AppLovin launched a web advertising program for e-commerce, which showed positive results in its pilot phase. The company anticipates its software business to grow by 20% to 30% in the long term.
InvestingPro Insights
As AppLovin Corp (NASDAQ:APP) receives a positive outlook from BofA Securities, the latest InvestingPro data provides additional context for investors considering the company's stock. With a robust market capitalization of $30.48 billion and impressive revenue growth of 37.31% over the last twelve months as of Q2 2024, AppLovin's financial health appears strong. The company's ability to sustain a high gross profit margin of 71.8% further underscores its operational efficiency.
InvestingPro Tips highlight that AppLovin's management has been actively buying back shares, signaling confidence in the company's future. Analysts expect net income and sales to grow this year, aligning with BofA Securities' positive stance.
With a significant price uptick of 43.64% over the last six months and a year-to-date price total return of 116.39%, the stock's performance has been noteworthy. However, it is important to note that AppLovin is trading at a high earnings multiple of 35.56 and does not pay a dividend to shareholders, which may influence investment strategies.
For investors seeking a deeper dive into AppLovin's prospects, InvestingPro offers additional tips, including insights into the company's valuation multiples and profitability predictions. These details can be found at InvestingPro's dedicated section for AppLovin, which currently lists over 10 exclusive tips that could further inform investment decisions.
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