AppLovin stock is twice as profitable as investors think it is.
AppLovin (APP 0.74%) investors were lovin’ the stock market last week — but this week, not so much. Shares of the marketing and monetization software specialist surged more than $10 in price last Thursday after the company reported a big earnings beat. All this week, however, AppLovin stock has been giving back its gains.
But here’s the good news: According to BTIG analyst Clark Lampen, AppLovin is due for a turnaround, and the stock could trade for $100 a share within a year. That implies a 19% upside.
Is AppLovin stock a buy?
Lampen may be right about that. Consider the numbers AppLovin reported last week:
- Q1 sales rose an astounding 48% to $1.1 billion.
- Net profit margins flipped from negative 1% a year ago to positive 22%.
- Instead of losing $4.5 million as it did a year ago, the company earned $236 million.
- AppLovin generated free cash flow of $388 million.
In a note covered on StreetInsider.com, BTIG’s Lampen pointed out that AppLovin’s numbers “significantly exceeded consensus” estimates. The analyst says AppLovin’s e-commerce division is “making progress” and its gaming segment has a longer runway for Software growth in 2024 than previously thought.
My view is that this is more than just a revenue growth story. The real story about AppLovin is its tremendous growth in free cash flow, which belies the stock’s apparently rich price-to-earnings (P/E) ratio.
Consider: Over the last 12 months, AppLovin “earned” $597 million, which, applied to a $30.5 billion enterprise value, gives the stock a lofty 51x multiple to earnings. But AppLovin generated $1.2 billion in positive free cash flow — twice its reported earnings — resulting in an enterprise value-to-free-cash-flow ratio of only 25.
For a company that’s expected to grow earnings by only 20% annually over the next five years, and that just increased its sales by more than twice that, this seems a tempting valuation. At $84 a share, AppLovin stock already looks like a buy, and a $100 valuation doesn’t look out of reach.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.