Investing.com -- Shares of AppLovin Corp (NASDAQ:APP) fell by 3.3% in pre-open trading on Monday following a downgrade from Goldman Sachs (NYSE:GS), which revised its rating to "neutral" from "buy."
The brokerage's decision comes amid growing concerns over the balance of risks and rewards in light of the stock’s sharp rise over the past year.
Since being added to Goldman’s Buy list in April 2022, AppLovin's shares have surged an impressive 192%, outpacing the broader S&P 500, which gained 30% during the same period.
With the stock price now at $143, reflecting a 113% gain since the company’s last earnings report, Goldman believes the valuation has reached a more balanced level.
AppLovin’s growth story has been primarily driven by its Software business, which includes its AXON 2.0 platform—an artificial intelligence-powered solution enabling performance optimization for mobile apps and advertisers.
Goldman Sachs had previously held a favorable view of AppLovin’s ability to capture market share in the mobile advertising industry, particularly in gaming.
However, the brokerage’s downgrade reflects a more tempered outlook, especially as the company’s stock price appears to have priced in much of the anticipated upside.
Goldman raised its 12-month price target for the stock to $150 from $103 but now views the risk/reward as balanced at current levels.
Despite the downgrade, Goldman Sachs remains positive on AppLovin’s Software segment, driven by AXON 2.0. In its most recent earnings call, AppLovin management outlined expectations for 20-30% year-over-year growth in software revenue over the coming years.
Goldman Sachs models software revenue growth of 27% in 2025 and 23% in 2026, aligning closely with management’s guidance but recognizing the challenges in quantifying the impact of developer-driven improvements.
In particular, Goldman notes that while the mobile gaming market is expected to grow by around 3% annually, sequential growth driven by AXON's machine-learning advancements could contribute up to 15% annualized growth. Additional upside is expected from new verticals such as eCommerce and Connected TV.
Goldman’s downgrade to “neutral” is largely a reflection of the stock’s appreciation and the challenges ahead in sustaining its high valuation.
AppLovin’s Software business is expected to continue growing at an attractive rate, but the current valuation reflects much of this optimism.
Goldman assigned an enterprise value-to-sales multiple of 13x for the Software segment in 2025, which represents a 27% YoY growth estimate.
For the Apps segment, a more conservative EV/sales multiple of 2.5x was applied, considering historical comps for mobile gaming companies.