AppLovin (APP 1.31%) 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.
