AppLovin's Q2 Report
AppLovin (APP) shares fell nearly 20% the morning after earnings, trading around $337. The report was mixed, and the stock is known for being highly volatile.
The company admitted it fell short of its own standards. It said the quarter came in below its usual performance, blamed a timing issue, and said the weakness will not continue.
The numbers:
- Q2 revenue of $1.92 billion, up 53% year over year. This landed at the bottom of the guidance range set in May and missed expectations.
- Earnings per share of $3.76, in line with estimates.
- EBITDA up about 50% to $1.61 billion, below the company's own forecast range and below expectations.
The single biggest growth driver is the performance of its AI models. When the models improve, advertisers get a higher return on their ad spending, so they raise their budgets. The latest model improvement landed just after the quarter ended, which made for a slower pace of improvement than normal during the period. The company said it saw no slowdown in advertiser demand and no change in the competitive environment. The current quarter is off to a strong start, with the CEO saying the business is back on the expected trajectory.
The Q3 outlook was slightly soft. Revenue is guided to $2.06 to $2.09 billion; the street wanted $2.08, so the midpoint sits a bit above expectations. EBITDA is guided to $1.71 to $1.74 billion against a $1.76 billion estimate, so that range runs a little below.
Analyst Reaction
Price targets moved all over the place, but ratings stayed bullish. More than 90% of analysts covering the stock hold a positive view. The move reads as a rerating on the earnings rather than a turn to bearish.
- Deutsche Bank: target cut to $580 from $660, kept buy.
- Wedbush: cut to $610 from $640, kept outperform.
- Benchmark: cut to $500 from $775, kept buy.
- Oppenheimer: cut to $560 from $660, kept outperform. Notes blamed the miss on timing, with intraquarter model uplifts less impactful and one big uplift arriving only after quarter end, which is now driving reacceleration.
- RBC Capital: cut to $575 from $700, kept outperform. Called it a rare misstep, with the model improvements landing lighter than expected for the quarter, which the company fully admitted.
- BofA: cut to $430 from $705, nearly a 50% reduction, kept buy. Lowered its valuation multiple because the consumer segment is "no longer a major plank of our bull thesis." Kept buy because gaming model innovation should restart a beat-and-raise cycle.
- UBS: took $8 off, target still $790.
- Piper Sandler: the one downgrade, to neutral from overweight, target cut to $385 from $665, just above the current price. Said APP missed at the midpoint for the first time since going public. Believes the size of directed model improvements may need to be larger going forward to hit street estimates, and has more questions than answers about the company's ability to beat estimates after this rare miss.
Trading the Stock
Fans of the name have to accept it will be volatile. The stock traded at $700 to $730 less than a year ago on optimism about the near-term future. That immediate payoff has not shown up, but the long-term story looks intact. A cautiously optimistic stance fits: revenue grew 53% and income grew 54%, exciting growth. Expectations may have run ahead at $730, but with a longer view the stock could regain that level.
For the short term, a lot of damage has been done, and it usually takes a few months to wash out and settle. An example trade: sell the September $300 puts, a level where buying the stock would be acceptable. That collects about $14, roughly a 3% return for waiting about 40 to 45 days. If the stock drops to $300, buy it there; otherwise keep the 3% and move to the next trade.
Broader Market
Software was weak across the board, with the IGV software ETF down. Chips rallied except for those that reported, with SanDisk and Western Digital getting hit. The Mag 7 was mixed and the index looked rangebound.
Markets sit very close to all-time highs, having hit some recently. Volatility is showing up inside individual names rather than across the whole market. Sectors are not all moving the same way on the same day, which limits the size of rallies but also cushions down days, since sectors do not fall together either. The result is lower correlations across the market, which is typical when the market consolidates and trades sideways. That sideways action has run since July and is not a bad sign given how long and sustained this market has been. Industrials, energy, and tech were the only sectors holding green.
