Subdued Growth No Barrier To AppLovin Corporation (NASDAQ:APP) With Shares Advancing 31%

AppLovin Corporation (NASDAQ:APP) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The annual gain comes to 104% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, AppLovin may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 37.2x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 4.9x and even P/S lower than 2x aren't out of the ordinary. 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.

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See our latest analysis for AppLovin

How Has AppLovin Performed Recently?

Recent times have been advantageous for AppLovin as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think AppLovin's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, AppLovin would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 98% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 117% 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.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 25% per year over the next three years. That's shaping up to be materially lower than the 30% each year growth forecast for the broader industry.

With this information, we find it concerning that AppLovin is trading at a P/S higher than the industry. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

AppLovin's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

It comes as a surprise to see AppLovin trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware AppLovin is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on AppLovin, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.