AppLovin Stock Could Rise 25%, Analyst Says. Here’s Why.

AppLovin stock is set to join the S&P 500 index on Sept. 22. (Courtesy AppLovin)

Key Points

About This Summary

• Wedbush analyst Alicia Reese reiterated an Outperform rating on AppLovin and hiked the price target to $725 from $620.
• AppLovin will be added to the S&P 500 index before markets open on Sept. 22, and shares have rallied 76% this year.
• Reese expects growth to continue, and the Epic Games vs. Apple case could become a tailwind for AppLovin next year.

AppLovin stock has rallied this year, and one analyst says the mobile technology company is poised for further gains.

Wedbush analyst Alicia Reese reiterated an Outperform rating on shares and hiked her price target to $725 from $620 in a note Friday. Shares were up 1.6% at $580.36, with Reese’s target price suggesting 25% upside.

AppLovin, which provides marketing and monetization tools for mobile app developers, was finally tapped to join the S&P 500 index earlier this month after being passed over in the previous rebalancing. The stock will officially be added to the index before markets open on Sept. 22.

It’s only the latest positive development for the mobile technology company. AppLovin’s shares have rallied 76% this year, buoyed by positive analyst ratings and solid quarterly results.

Reese, for one, expects growth to continue “for the foreseeable future, and at a staggering profit margin.”

She anticipates the company will benefit in the current year from ongoing momentum in mobile gaming. The Epic Games vs. Apple case, which culminated in a partial victory for the videogame company, could become a tailwind for AppLovin next year, Reese added.

As developers will no longer have to pay a 15% to 30% commission for certain in-app purchases on the App Store, they could spend that money elsewhere, including in user acquisition and marketing.

AppLovin CEO Adam Foroughi alluded to this possibility on an earnings call in August, saying it would “take longer than people expect” for the benefits of that ruling to materialize.

Following recent meetings with members of management, “we came away more confident that AppLovin has secured its growth trajectory and moat within the performance marketing space for at least another three years,” Reese continued.

In her view, the company’s goal of 20% to 30% top-line growth is supported by supply and demand expansion in mobile games. She believes the company’s competitive advantage is secure, even as rivals “will ultimately close the gap toward its proprietary technology.”

Reese conceded that AppLovin’s goal to expand into e-commerce and international markets while maintaining Ebitda (earnings before interest, taxes, depreciation, and amortization) margins in the range of 80% to 85% may raise eyebrows. However, the company has plans to trim costs across certain areas of its business, notably its sales teams, Reese said.

AppLovin fell on hard times earlier this year after two short sellers published scathing reports alleging the company’s ads violated the terms of Google and Apple’s app stores, among other claims. These were followed by a third short report in March, which caused shares to plunge by 20%.

When asked to provide comment, the company directed Barron’s to a blog post by CEO Foroughi, who argued that claims within the reports could be dispelled in a matter of minutes.

Shares have recovered since then, and it seems the reports did little to tarnish AppLovin’s reputation. Attitudes on Wall Street remain bullish. Of 29 analysts polled by FactSet, 23 rate AppLovin at Buy or the equivalent. Four rate the stock at Hold, and two at Sell.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com