AppLovin Corporation's (NASDAQ:APP) 26% Share Price Surge Not Quite Adding Up

AppLovin Corporation (NASDAQ:APP) shares have continued their recent momentum with a 26% gain in the last month alone. This latest share price bounce rounds out a remarkable 322% gain over the last twelve months.

After such a large jump in price, AppLovin's price-to-sales (or "P/S") ratio of 13.4x might make it look like a strong sell right now compared to other companies in the Software industry in the United States, where around half of the companies have P/S ratios below 4.8x and even P/S below 1.8x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for AppLovin

What Does AppLovin's P/S Mean For Shareholders?

Recent times have been advantageous for AppLovin as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on AppLovin will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

AppLovin's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 37%. The strong recent performance means it was also able to grow revenue by 83% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 16% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 20% per year growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that AppLovin's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On AppLovin's P/S

The strong share price surge has lead to AppLovin's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Despite analysts forecasting some poorer-than-industry revenue growth figures for AppLovin, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for AppLovin that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.