AppLovin stock has surged: brace for mean reversion in 2025

AppLovin stock price has gone parabolic this year, rising by 760%, and becoming the best-performing player in the Russell 1000 index. APP’s surge has helped to transform the little-known into a $134 billion juggernaut. So, does the APP stock has more upside in 2025?

AppLovin stock price has become highly overbought

The weekly chart shows that the APP share price has been one of the best-performing companies in the United States. After bottoming at $7.4 in 2023, it has surged by over 4,945%. 

The rally accelerated after the stock soared above the key resistance level at $115.73, the highest swing in November 2021. That was the upper side of the cup and handle pattern, a popular bullish sign.

AppLovin stock has remained above the 50-week and 100-week Exponential Moving Averages, a sign that bulls are in control.

The Relative Strength Index (RSI) has moved to the overbought level of 77. Similarly, the MACD and the Stochastic Oscillator have all pointed upwards. 

Therefore, there is a risk that the stock will have a mean reversion, a situation where an asset drops and moves to its key moving averages. A likely scenario is where the stock drops to the key support at $200. A move above the year-to-date high of $418 will invalidate the bearish view.

Read more: Are there more gains ahead for AppLovin?

Valuation concern remain

Most analysts believe that American stocks are highly overvalued. Recent data shows that the S&P 500 index has a forward P/E ratio of 22.3, higher than the five-year average of 19.7.

Still, stocks and other assets can remain overvalued for a long time as long as there is momentum. For example, firms like Visa and Mastercard have been overvalued for decades. 

AppLovin is one of the most overvalued companies in the United States. It has a market cap of over $134 billion and made a revenue of $4.2 billion in the trailing twelve months. 

This means that, excluding debt, if you bought the company at the current $134 billion valuation, it will take you 32 years to recoup your money. And that is just on volume. When you look at its net income, it would take you 116 years to break even. 

According to SeekingAlpha, AppLovin has a forward P/E ratio of 77, much higher than the sector median of 26. 

These numbers would be a bit understandable if the company was having a strong growth. The most recent results showed that its quarterly revenue rose by 39% in the last quarter to $1.20 billion. Most of this growth was from its software platform as its app revenue rose by just 1%.

Analysts expect that its annual revenue for the year will be $4.59 billion, a 39% increase from last year. It will then make about $5.6 billion in the next financial year. 

On the positive side, the company has a positive Rule of 40 metrics. Its revenue growth was 39%, while its net income margin was 36%. Ideally, a software company is said to be undervalued if it has a metric of 40 and above. 

Still, in the long term, there is a risk that the AppLovin stock will go through a mean reversion in 2025.