AppLovin Shares Plunge Despite Stellar Growth. Is it time to buy falling stocks?

Despite posting strong growth in the fourth quarter and issuing optimistic guidance, shares of AppLovin (NASDAQ: APP) They collapsed after the company reported its results. The stock has lost more than 40% of its value this year, as of this writing. Let’s take a closer look at the company’s results and outlook to see if this decline is a good buying opportunity.

AppLovin’s stellar growth in recent years has been driven by its Axon 2.0 artificial intelligence (AI) ad technology platform, and that continued in the fourth quarter. The company’s revenue increased 66% to $1.66 billion.

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The company also continues to increase its gross margin while reducing its operating costs. In the fourth quarter, its gross margin improved to 88.9% from 84.7% a year ago, while it reduced its operating costs by 9%, including reducing its sales and marketing expenses by 21%.

Earnings per share (EPS) from continuing operations rose 87% from $1.73 a year ago to $3.24, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) soared 82% year over year to $1.4 billion.

The company is also generating a lot of cash. For the quarter, it generated free cash flow of $1.3 billion and $3.95 billion for the full year. It ended the year with $1 billion in net debt, up from $2.8 billion at the start of the year, helped by its free cash flow and the sale of its apps business. The company also repurchased 800,000 shares in the quarter and 6.4 million for the year.

Looking ahead, AppLovin projected first-quarter revenue to be between $1.745 billion and $1.775 billion, representing growth of between 50% and 53%. It forecasts adjusted EBITDA to be between $1.465 billion and $1.495 billion.

AppLovin once again had a strong quarter, with growing revenue and gross margin expansion. Meanwhile, it’s rare to see a company grow so quickly while reducing its operating costs.

The company’s growth continued to be largely driven by its mobile gaming advertising business, but it is looking to launch its self-service e-commerce platform for general availability later this year. AppLovin has also begun testing AI tools to help automate part of the creative process and help clients create new video ads en masse more cost-effectively. These are all potential growth opportunities.

However, there have been some concerns about increased competition in the gaming advertising space, particularly from Metaplatformswhich analysts continued to bombard AppLovin management with questions about during its earnings call. Meta used to have around 50% market share in the gaming advertising space, but AppLovin management noted that the market is very different today and that Axon 2’s closed-loop model continues to make it better and smarter, giving it an advantage.

Following the sell-off, the stock is trading at a forward price-to-earnings (P/E) ratio of less than 26.5, based on analyst estimates for 2026. For the growth AppLovin is seeing, that’s cheap. That said, given the current market environment, I would only cautiously look to add a small position.

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Geoffrey Seiler has positions at Meta Platforms. The Motley Fool has positions on and recommends Meta Platforms. The Motley Fool has a disclosure policy.

AppLovin Shares Plunge Despite Stellar Growth. Is it time to buy falling stocks? was originally published by The Motley Fool