My previous analysis of AppLovin had been optimistic, and indeed, the company's stock saw a 50% increase since my initial positive assessment in August. This positive performance aligned with my investment hypothesis, reflecting a period of significant growth for the company.
Nevertheless, a reevaluation of AppLovin's prospects now points to a more cautious outlook. Recent shifts in market sentiment, combined with the adverse effects of declining communication services revenue on advertising agencies, are concerning. Additionally, a reported inquiry by the SEC into the company's data practices introduces a new layer of risk and potential negative catalysts. Given these factors, particularly with the stock trading at a high 60 times its forward earnings, the margin for error is extremely thin. This becomes especially pertinent if the company's impressive adjusted EBITDA margin, currently ranging between 82-83% due to its e-commerce expansion, begins to normalize. While ongoing share buybacks and a successful rollout of the Axon Ads Manager could offer some support, a period of consolidation, potentially below the $500 mark, seems probable.
The journey of investment is rarely a straight line; it is marked by continuous analysis and adaptation to new information. Recognizing when the tides turn and being prepared to adjust one's strategy is crucial. It underscores the importance of not just identifying opportunities, but also diligently monitoring the landscape for potential shifts that could alter the initial outlook, thereby fostering a more informed and resilient investment approach.
