AppLovin Surges After Strong Q2, Pullback Could Offer Buy Point

AppLovin Corp. NYSE: APP shares advanced 2.52% on August 14 in heavy volume, the third session in a row of gains after a second-quarter report that topped analysts' views.  

The company pivoted back to profitability after two quarters in a row of losses. Earnings came in at 22 cents a share, up from a loss of 6 cents a share in the year-earlier quarter. 

Revenue of $750.2 million was 3% below last year’s second quarter, although, as you can see using MarketBeat's AppLovin earnings data, the company exceeded top and bottom-line views. 

Stock Gapped Up After Earnings 

Take a look at the AppLovin chart. If you set the view to either bars or candlesticks, you'll get a granular look at how the stock vaulted higher immediately after the report, gapping 26.49% higher. It added to those gains in the next session, advancing another 4.54%. 

AppLovin has posted the following gains recently:

• 1 week: 24.01%
• 1 month: 38.45%
• 3 months: 76.77%
• Year-to-date: 269.33%

A prior track record of market-beating gains frequently means the stock is poised to advance even further. 

AppLovin helps companies grow their apps and accelerate their business. It provides advanced tools for mobile app developers to automate and optimize marketing and monetization. In particular, the company is focused on game developers. 

The company also has a portfolio of apps it owns, which it grows via an acquisition and partnership strategy. 

Software Platform Revenue Growing

In the second quarter, revenue from the software platform was $406,063, while revenue from apps was $344,102. 

The software platform includes a comprehensive suite of tools for developers to get their mobile apps discovered and downloaded by the right users and optimize return on their marketing spending. 

That's the side of the business that's growing as the company scales back on its apps business. In its most recent annual report, the company said, “We are continuing our strategic review and optimization of our apps portfolio and its cost structure, focusing on identifying those assets which contribute value and how best to optimize each of those asset's contribution to our overall financial performance."

It went on to say this review has resulted in the divestiture or closure of certain app-production studios, a reduction of headcount, and restructuring of earn-out arrangements for game producers, among other changes.

Think about those ramifications: As AppLovin focuses on growing revenue on the software platform, it's deliberately allowing revenue and costs on the apps side to dwindle. That contributed to both the lower revenue number, but also the higher earnings number. 

Use Of AI Boosting Efficiency

One item that cheered investors was the company's increased use of AI to grow the software platform by boosting efficiency. 

In a letter to shareholders, The company said its record second-quarter software platform revenue was driven by the rollout of AI advancements to its machine learning recommendation engine, called Axon. Axon uses algorithms to predict which apps a user is most likely to download. AppLovin said the enhanced AI capabilities drove higher installs and revenue per install in the quarter, with improved returns for advertisers.

AppLovin went public in April 2021, after the October 2020 peak of companies being rewarded for being all things online, all the time. The stock rallied until November 2021 and then got swept away with the big 2022 tech meltdown. 

As noted above, the stock has been rallying in 2023, notching big price gains after the past three earnings reports. 

Even before the most recent earnings report, the stock was in rally mode. It cleared a buy zone above $17.38 in May, and it's currently extended beyond that point. 

Moving-Average Pullback Could Be Constructive

The stock is now 20.20% above its 10-week average and 44.60% above its 50-day line. Those numbers are excellent indicators that it's prudent to wait until the stock pulls back and gets support at a key moving average. 

As a new company in fast-growth mode, AppLovin doesn't pay a dividend, but the company's board authorized a $750 share repurchase program. 

Companies opt for share buybacks over dividends because it gives them more flexibility and control over capital, avoids taxation of dividends and preserves control of ownership. You can easily see how all of those would appeal to a young, fast-growing company and its shareholders.