AppLovin (APP 0.85%) has been a popular moneymaker with an average daily trading volume of more than 4,365,000 over the past few months. So why should you think about selling?
Let’s examine three solid reasons you should at least begin pondering if and when to exit the stock. We begin with a look at AppLovin’s key to success.
What works so well for AppLovin, and how could it stop working?
AppLovin is multifaceted but notably a mobile ad network that places ads for its clients’ apps in the digital path of users most likely to download. Each ad network has its proprietary algorithmic strategy, but AppLovin’s receives massive praise for its success rate.
However, any change in the mobile ad environment can present roadblocks. For example, in 2021, Apple debuted a new privacy scheme shielding apps from tracking users within apps and across apps. To do so would require permission from the user. Not surprisingly, many iOS users decided not to grant permission.
The update meant mobile advertisers would no longer have easy access to the customer data that help them effectively target customers. However, AppLovin, adapted well to the new rule, using AI-driven technology to find a productive workaround.
Despite AppLovin’s success, the event shows that ad networks could become vulnerable if privacy restrictions become too severe. For example, Apple and Alphabet’s Google could alter codes of conduct in favor of their in-house ad programs.
Competitors could also create equal or superior AI technology for targeting users. If and when such adverse events occur, be prepared to consider whether to remain with AppLovin or move on.
How much room is there for AppLovin stock to run?
The stock peaked on Nov. 21, 2021, with a share price of $114.85. A year later, it sunk below $10 in Dec. 2022.
But that set the stage for a remarkable comeback through 2023 till now. Over the past 52 weeks, the price has gone from $25.82 to $91.91.
You’ll have to determine if the available room for AppLovin to climb is enough to warrant your investment. You should also decide which price point will trigger your exit.
How much are you willing to pay to own AppLovin?
Let’s look at AppLovin’s price-to-earnings-to-growth or PEG ratio. The PEG ratio differs from the price-to-earnings or P/E ratio by combining past data with future conjecture.
It takes the historical P/E figure and compares it to the future growth rate that analysts expect to see from the company. Many consider the PEG to offer a more comprehensive look at a stock than the P/E alone provides.
Analysts predict a massive growth spurt for AppLovin this year, with an average prediction of 207.10%. That increase would produce a PEG ratio of 0.19. Generally, a PEG ratio below 1 makes the stock a must-buy.
The growth estimate for 2025 is 27.20% for a PEG of 1.49. Over the next five years, experts think the growth will be at 20%, creating a PEG of 2.03.
What do all these numbers tell you? AppLovin needs to report consistently substantial growth to be worth its asking price over the next five years.
Should you forget about AppLovin?
If you’ve owned the stock for several years, you deserve congratulations for recognizing a winner in its early stages. However, your investment strategy should always include a contingency for selling. A game plan will keep you from being emotionally tied to the stock and remind you circumstances inevitably change.
For example, the privacy safeguards affecting mobile apps and advertisers could be tightened. Also, technological achievements by competitors could eat into AppLovin’s earnings.
And keep in mind that all growth companies eventually mature and no longer see the rapid growth of their earlier days. As a result, their share prices may no longer be a bargain.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool has positions in and recommends Alphabet and Apple. The Motley Fool has a disclosure policy. Joseph Wilborn has no position in any of the stocks mentioned.
