Analyst resets AppLovin stock forecast on hidden metric

AppLovin is a closely watched mobile advertising and AI story, and investors are focused on how much additional growth is possible after rapid gains. Morgan Stanley reiterated an Overweight rating and a $720 price target, with a $1,100 bull case tied to continued improvement in conversion rates. The firm notes that about 99% of AppLovin ads still do not convert, but frames this as a large opportunity for efficiency gains. AppLovin’s conversion rate is estimated to have increased from 1.0% to 1.3% over the past 18 months. The company reported strong financial results, including first-quarter revenue of $1.84 billion and guidance for second-quarter revenue and EBITDA margin.

"Morgan Stanley says the answer may come down to a hidden metric inside AppLovin's ( APP) advertising engine. In a Morgan Stanley note given to TheStreet, analyst Matthew Cost and team reiterated an Overweight rating on AppLovin and a $720 price target. That target sits well above AppLovin's May 22 closing price of $481.68. The firm also laid out a $1,100 bull case if one key operating metric keeps improving."

"Morgan Stanley's bull case centers on conversion rates, or how often an ad shown through AppLovin leads to an install or another desired consumer action. The firm says about 99% of AppLovin's ads still do not convert. That sounds like a weakness at first glance, but Morgan Stanley frames it as the central reason AppLovin may still have more room to grow."

"Morgan Stanley estimates AppLovin's conversion rate has risen from 1.0% to 1.3% over the past 18 months. The firm said AppLovin still trails market leaders such as Meta by a wide margin on a comparable "true" conversion-rate basis. That performance gives Morgan Stanley confidence that AppLovin's ad technology is already working. The bigger issue is whether the company can keep improving the efficiency of that technology."

"The company reported first-quarter revenue of $1.84 billion, up 59% from a year earlier. Net income rose to $1.21 billion, while adjusted EBITDA increased 66% to $1.56 billion. The company also guided for second-quarter revenue of $1.915 billion to $1.945 billion and adjusted EBITDA margin of 84% to 85%."

Read at Yahoo Finance