AppLovin Pulled Back 16% in June. Is It a Buy?

Written by Jeremy Bowman for The Motley Fool->

Legacy cloud software stocks like Salesforce and Adobe are dragging the sector down.

The stock looks attractive on a forward earnings basis.

Shares of AppLovin (NASDAQ: APP) were moving lower last month, even after several positive analyst notes, as headwinds in the software sector weighed on the stock.

While AppLovin isn't a traditional software-as-a-service (SaaS) company, the stock has tracked with the sector this year as it trades at a high valuation, and some investors believe it faces AI disruption risks similar to those of the big cloud software companies.

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As a result, AppLovin finished last month down 16%, according to data from S&P Global Market Intelligence. As you can see from the chart below, the stock trended with the iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV), in which it's one of the top ten holdings.

There was no major company-specific news out on AppLovin last month, but it couldn't escape the headwinds around the broader software sector.

Early in the month, disappointing earnings reports from companies like Salesforce, Adobe, and Oracle fed ongoing concerns about AI disruption, which may have been fueled by the fervor around the SpaceX IPO, and fears of rising interest rates following Kevin Warsh's first FOMC meeting also pressured the software sector lower.

As a high-growth stock, AppLovin is sensitive to interest rates, so it makes sense that it would pull back on signs that rates were going up, but it hasn't exhibited any AI-related slowdown, and it has a much different business model than SaaS leaders like Salesforce and Adobe.

Additionally, smaller rival Liftoff Mobile went public in early June, which could have prompted some selling in AppLovin as investors rotate to that stock or due to concerns that Liftoff will have more money to challenge AppLovin following the public offering.

Despite the sell-off, AppLovin received several Wall Street endorsements last month.

Citigroup opened an "upside 90-day catalyst watch" on the stock, and said the company could top estimates, driven by its e-commerce platform moving to general availability, though it removed the catalyst watch later in the month.

Edgewater Research upgraded the stock from neutral to outperform, and Raymond James initiated coverage with a strong buy and a price target of $640.

AppLovin has been a volatile stock over the last year, more than doubling at one point before giving up nearly all of those gains.

It's trading at a high valuation, but it has the growth to back it up as analysts expect revenue to jump 54% in the second quarter to $1.94 billion and for earnings per share to increase from $2.39 to $3.75.

AppLovin is now trading at a forward P/E of just 33. If it can maintain its growth rate, the adtech stock should move higher.

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Citigroup is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in AppLovin. The Motley Fool has positions in and recommends Adobe, Oracle, and Salesforce. The Motley Fool recommends the following options: long January 2028 $330 calls on Adobe and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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