Where I'm Shorting AppLovin as Advertising Business Explodes

What was that? A shooting star? Was it a comet? Nope and nope. Those were the shares of AppLovin Corporation APP screaming higher overnight after the firm reported its Q4 financial results following Wednesday's closing bell. It was as if Gil Favor and Rowdy Yates were driving the herd across the dusty plains in a hurry.

Keep rollin', rollin', rollin'

Though the streams are swollen

Keep them doggies rollin'

Rawhide

-Dimitri Tiomkin and Ned Washington, 1958

For the period ended December 31, 2024, AppLovin posted a GAAP EPS of $1.73, crushing expectations that were down in the mid-$1.20s. Revenue grew 43.7% to $1.373 billion, also besting what Wall Street was looking for. It's difficult to describe how successful a quarter it was for the Palo Alto, California based app discovery services provider and AI powered matchmaker that puts advertiser demand together with publisher supply. These guys are rockin'.

AppLovin Operations

To reach that revenue number, which was up 43.7%, advertising revenue popped for growth of an incredible 73% to $999.487 million, while app revenue contracted 1% to $373.292 million. The cost of revenue increased 17.1% to $310.452 million. Total costs and operating expenses together grew 11.9% to $764.799 million. This left an operating income of $607.98 million (+126%) as GAAP operating margin soared from 28.3% to 44.3%.

After accounting for interest, other income and expenses and taxes, net income attributable to the shareholders printed at a GAAP $599.057 million, up a stunning 249% from the year-ago comparison. This works out to a $1.73 per fully diluted share, up from $0.49 for the same period last year.

AppLovin Stock Fundamentals

For the quarter reported operating cash flow grew 104% to $701.003 million. Out of that number came capex spending of just $490,000, yes that's right, and principal payments of $5.351 million on finance leases. This left a free cash flow of $695.162 million, which was good for growth of 105%. 

The firm does not pay a cash dividend out to shareholders, but did repurchase $981.297 million worth of common stock for the firm's treasury during the quarter. That's more than what free cash flow came to, which often makes me feel uncomfortable, but as we'll see in a second, the balance sheet was set up for this.

Looking at the balance sheet, the firm ended the period with a cash position of $741.411 million (+48%) and current assets of $2.312 billion (+43%). Current liabilities added up to $1.057 billion including $69.839 million worth of deferred revenue (not a true financial obligation) and absolutely no short-term debt. This puts the firm's current ratio at a strong 2.19 and when adjusted for deferred revenues, a stronger 2.34.

Total assets amount to $5.869 billion, of which goodwill and other intangibles account for a rough $2.7 billion. At 46% of total assets, this is a little bit much for my blood. Total liabilities less equity comes to $4.779 billion. This does include a fairly daunting $3.509 billion in long-term debt. That's up almost 21% in 12 months. This won't impact the firm's operations this year and maybe not for several years, but the firm will eventually have to work on managing that debt load.

AppLovin Stock Guidance

For the current quarter, AppLovin projected revenue of $1.03 billion to $1.05 billion in revenue just for the advertising business, while the Apps business contributes sales of $325 million to $335 million. 

That brings total expected revenue to a range of $1.355 billion to $1.385 billion, bringing the lower bound of the range above the $1.33 billion or so that Wall Street was looking for. At the midpoint, this would be good for year-over-year growth of 29% to 30%. Total company adjusted EBITDA margin is seen at 63% to 64%.

Wall Street's View on AppLovin

Since these earnings were released last night, I have come across nine highly-rated (four-plus stars at TipRanks) that have opined on APP. Among the nine, there are eight "buy" or buy-equivalent ratings and one "hold" rating. 

The average target price across these nine analysts is $576.11 with a high of $630 (Chris Kuntarich of UBS) and a low of $500 (Eric Sheridan of Goldman Sachs). Once those two are omitted as possible outliers, the average target price rises to $579.29.

My Thoughts on AppLovin Stock

This was a heck of a quarter. The advertising business is exploding. Guidance is strong. Cash flows are quite robust. There's a lot to like. The current situation is strong. The long-term debt load is the only potential blemish I can find when thinking about this firm and that is not today's problem.

Readers will see that APP is threatening on Thursday morning to break out (to the upside) of an already upward sloping trend that stretches back to September. Readers will also see that without breaking the trend, the stock built a falling-wedge pattern in December 2024 that helped set this rally up. That said, a 33% (or so) pop is rather incredible.

Relative strength soared this morning to what may be unsustainable levels as the daily MACD is obviously sending bullish vibes. Thursday morning's gap is getting attention, at least from me. The stock would have to trade down to $390 from roughly $507 to fill this gap. Not to detract from this stock, but I have to think that there will be an attempt, perhaps after all of the analysts have weighed in, to fill at least part of that gap.

I see this as a short-term trade idea, just as I saw the Tesla TSLA long-side trade on Wednesday as short-term. If you got long TSLA on Wednesday with us, you are now up about 6% on that trade. I will be exiting that trade this morning. 

This short-term trade idea is a short idea. I'm not looking for a home run. Just a 5% gain or so when the gap is tested, hopefully later today. I won't venture to get short this name until it trades at $496 or below (enters the gap).

At the time of publication, Guilfoyle was long TSLA equity.