Is AppLovin Stock A Good Buy?

After a lackluster performance on its first day of trading, we look at AppLovin as a company and see if this stock is a good buy right now

Founded in 2011, AppLovin (NASDAQ: APP) is a mobile game developer which gives other companies the tools to manage and further monetize their own apps. This company went public on the 15th of April and with many investors having not yet made up their minds about this stock, we decided to see if AppLovin is a good buy. 

Bull Case

AppLovin has shown strong growth in revenue since 2016; it grew at a compound annual rate (CAGR) of 76% between then and 2020. The company expects this growth to continue particularly as it has other company acquisitions as part of its strategy. Having recently completed its plans to acquire the German mobile-app measurement and marketing company, Adjust, AppLovin is looking to enhance software set for its developers, falling in line with its plans to grow the platform overall.

AppLovin claims its total addressable market will expand from $189 billion in 2020 to $283 billion in 2024, according to estimates. Currently, it owns a variety of mobile game studios which provide more than 200 games for consumers to play. Mobile gaming is a growing industry with huge potential as visuals, interactivity, and connectivity improve. AppLovin currently has 410 million users in a pool of 2.5 billion overall, but with its continued development in the mobile game space, it will hopefully see this number increase quickly.

Furthermore, cloud gaming, in general, is set to become a huge industry as it expects the value to grow to $7 billion over the next 6 years. Companies in the PC, console, or mobile gaming world will see their business grow as a result as demand for gaming apps increases.

Bear case

Unfortunately, this stock does have a good few bear cases for the moment. Its timing for going public might not have been the best as many investors have quite rightly pointed out that it is now the latest public underdog company in an overly saturated market. This makes it vulnerable when it generates its revenue from just 2 segments; business and consumer. Plus, in total, the company can only claim to control 1% of the global mobile apps market.

Whilst AppLovin has been profitable in the past, it cannot produce consistent profits year after year. 2018 saw a net loss of $260 million, 2019 then has a $119 million profit, followed by another year with a net loss of $126 million in 2020. The continual return to red could be a sign that the company is struggling to keep its head above the water and only went public in order to find a quick buck to pay off its outstanding debts. It plans to spend $400 million paying off these debts using IPO proceeds.

The new iOS 14.5 update will be a loss in revenue for the company as its business segment integrates revenue-generating ads into its clients’ apps. The new update will prevent third-party cookies from generating data for advertising, this will certainly be a loss for AppLovin in its business segment, although its consumer segment will be exempt as a 1st party ad provider. 

Indeed, Apple and Google’s processing fees hike hit AppLovin hardest in 2020, when the processing fees ran as high as 30% for purchases. As costs in the global mobile app market continue to rise, AppLovin could be disproportionately affected unless it starters to diversify its business. 

So, should I buy AppLovin stock? 

The company compares to another recently public company, Roblox, however, whilst Roblox is highly popular and well-known amongst younger generations, AppLovin does not have quite the same popularity, hence its lackluster first day trading in comparison to Roblox’s last month. 

Indeed, this company does have the potential to grow, but that potential is obscured somewhat by the saturated market it works in and the fact that it cannot seem to produce consistent annual profits. Currently, this stock is not a good buy, but it does have the potential to grow into something in the future. This is a good stock to add to your watchlist for now.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.