AppLovin: S&P 500 Inclusion Adds to the Stock’s Momentum, but Shares Appear Overvalued

Key Morningstar Metrics for AppLovin

• Fair Value Estimate: $360
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

AppLovin APP rallied 10% in early trading on Monday, Sept. 8, after Friday’s announcement that it would be included in the S&P 500 along with Robinhood HOOD and Emcor EME.

Why it matters: With around $7 trillion benchmarked or indexed to the S&P 500, inclusion creates a near-term positive for AppLovin. There will now be a steady passive bid from index trackers and investors who benchmark to that index.

• Because index-investing strategies have likely already front-run the announcement, combined with our view that the company is overvalued, there isn’t a trade here for investors.

The bottom line: We maintain our $360 fair value estimate, as nothing has fundamentally changed with the company. We see AppLovin as overvalued, but we emphasize our Very High Uncertainty Rating, since so much hinges on the successful rollout of its black box for nongaming advertisers.

• The black box is designed to identify mispriced advertising inventory and generate a high return on ad spending. It has proved effective in monetizing mobile gaming inventories and expanding gaming businesses, but its broader use with e-commerce advertisers and new inventories remains uncertain.
• AppLovin’s shares have surged since April and now trade at a 350% enterprise value/sales premium compared with The Trade Desk. For ad tech exposure, we believe TTD offers a much better risk/reward profile, but we acknowledge that AppLovin could continue to trade higher in the near term.

Coming up: AppLovin has around 600 advertisers on the black box, but it has been selective about bringing on new clients. It plans an international rollout based on customer referrals in October. Since most of AppLovin’s user audience is international, success here would be a tailwind.