Shares of AppLovin Corp dropped by 3.3% in pre-market trading on Monday after a downgrade from Goldman Sachs.
The investment bank revised its rating on the mobile advertising tech company from “buy” to “neutral,” citing concerns over the stock’s recent surge and potential risk/reward balance.
Company Performance
AppLovin’s stock has been a standout performer, skyrocketing 192% since it was added to Goldman Sachs’ Buy list in April 2022.
The stock outpaced the broader S&P 500, which gained 30% over the same period. However, with shares currently trading at $143, representing a 113% gain since the last earnings report, Goldman believes the stock’s valuation has become more balanced.
AppLovin’s growth has been fueled by its Software business, which includes the AXON 2.0 platform.
This AI-powered tool is designed to optimize performance for mobile apps and advertisers, helping drive the company’s financial success.
Despite the downgrade, Goldman Sachs continues to view AppLovin’s Software segment positively, highlighting its potential for strong growth in the coming years.
Market Trends
While AppLovin’s growth has been impressive, broader market trends in mobile advertising and gaming play a key role in shaping its prospects.
Goldman Sachs notes that the mobile gaming industry is expected to grow at a modest 3% annually.
However, AppLovin’s AXON platform, with its machine learning capabilities, could help the company outperform, potentially contributing up to 15% annual growth for its software segment.
The stock’s sharp rise over the past year, alongside these market trends, has prompted Goldman to reassess its view.
The investment bank raised its 12-month price target for AppLovin to $150 from $103 but believes the stock’s recent gains have priced in much of the anticipated growth.
Expert Insights
Goldman Sachs’ downgrade to “neutral” reflects its view that AppLovin’s valuation may now have limited upside.
The stock has surged significantly, and while its Software business remains a key driver of growth, the current share price reflects much of this optimism.
Goldman Sachs still expects strong revenue growth from AppLovin’s Software business, projecting a 27% increase in 2025 and 23% in 2026, which aligns closely with the company’s guidance.
However, the bank also acknowledges challenges in quantifying the full impact of improvements from developers using the AXON platform.
Goldman applies an enterprise value-to-sales (EV/sales) multiple of 13x for AppLovin’s Software segment, reflecting the expected 27% year-over-year growth.
For the Apps segment, which primarily targets mobile gaming, a more conservative EV/sales multiple of 2.5x is used, in line with industry comparables.
Conclusion
Goldman Sachs’ downgrade is a reaction to AppLovin’s sharp rise and concerns about maintaining its high valuation.
Although the company’s Software segment is poised for solid growth, much of this has been reflected in the stock’s current price.
Investors should remain cautious as the stock may see limited upside in the near term, though long-term prospects, especially in mobile gaming and new areas like eCommerce and Connected TV, remain promising.
