Should AppLovin shares be in your portfolio before the third quarter?

AppLovin Corporation APP will report its third quarter 2024 results on November 6 after the market close.

Stay up to date on all quarterly releases: See Zacks Earnings calendar.

The Zacks Consensus Estimate for earnings for the quarter is pegged at 95 cents, representing growth of 216.7% from the prior-year quarter. The consensus revenue estimate is $1.13 billion, representing year-over-year growth of 30.8%.

An estimate for the reporting quarter was revised upward in the past 30 days, while there were no southward revisions. Over the same period, the Zacks Consensus Estimate for 2024 earnings has risen 6.7%.

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The company has an impressive history of surprising earnings. Earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with an earnings surprise averaging 21.1%.

AppLovin Corporation Price and EPS Surprise

AppLovin Corporation Price EPS Surprise | Quote from AppLovin Corporation

Third quarter profit beat seems unlikely for APP

Our proven model predicts no increase in profits for APP this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) increases the likelihood of an earnings beat. But that is not the case here. Use our Earnings ESP filter to discover the best stocks to buy or sell before they're reported.

APP has an Earnings ESP of -4.71% and a Zacks Rank #2.

You can see the complete list of today's Zacks #1 Rank stocks here.

An all-round healthy business should drive performance growth

We expect the company's revenue to improve year-over-year in the quarter under review, driven by an increase in software platform and apps revenue. The consensus estimate for software platform revenue is $763.44 million, representing year-over-year growth of 51%. The consensus app revenue figure is $367.72 million, indicating year-over-year growth of 2.2%.

Software Platform's consensus adjusted EBITDA is $559.3 million, representing year-over-year growth of 53.6%. App's adjusted EBITDA is expected to increase 50.8% year-over-year.

APP shares are in high spirits

APP has seen a massive increase of 299.2% year to date, significantly outpacing the industry increase of 32.7%. This is in line with its competitors in the mobile in-game advertising space, as Alphabet Inc. GOOGL is up 21.2%, and Metaplatforms META is up 58.5% year-to-date.

Image source: Zacks Investment Research

Despite this impressive rally, the stock remains in undervalued territory. Based on 12-month EV to EBITDA, APP trades at 34.11x, well below the industry's 49.45x. If we look at the forecast 12-month price-to-earnings ratio, APP shares are currently trading at 35.92 times forward earnings, which is below the industry's 38.13 times.

Investment risk and opportunities for APP

The introduction of AXON 2.0 technology and strategic expansion into gaming studios have significantly increased APP's revenue growth. Management has shown interest in expanding the software business by venturing into new verticals from its original gaming background. In the second quarter of 2024, AppLovin launched a pilot program that allows e-commerce stores with websites to purchase inventory for in-app video ads for mobile games.

These advertisements direct game users to the e-commerce store website. The key part is that management expects its software business to grow 20-30% over the longer term without being dependent on the expansion of its verticals beyond gaming. Therefore, AppLovin's successful expansion outside of gaming could boost its software business and help it grow beyond its initial target.

Although there are potential risks, such as the possibility of slowing growth in the in-game advertising segment and the uncertain impact of non-gaming ventures, AppLovin appears to be well positioned for further growth thanks to its technological advances and strategic expansion efforts.

What Should You Do With APP Stock?

Given AppLovin's impressive financial performance, growth potential, and undervalued stock price, it represents a strong buying opportunity for investors. The combination of strong revenue and profit growth, coupled with increasing analyst confidence, makes APP a compelling investment. Although the stock has risen significantly, the current valuation suggests there is still room for further upside.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.