This software stock offers 'a great buying opportunity': Jefferies

Investing.com -- Brokerage firm Jefferies sees “a great buying opportunity” in one software name following its recent sell-off, arguing that near-term fears have created a disconnect between fundamentals and valuation.

Jefferies is reiterating its Buy rating and $860 price target on Applovin (NASDAQ: APP), pointing to a -39% year-to-date decline that it believes does not reflect the company’s growth outlook.

“We believe the -39% YTD decline in APP’s stock is a great buying opportunity for a 50%+ top-line growth story trading at 15x our FY27 EBITDA,” analysts led by James Heaney said in a note.

The recent concerns around CloudX, Meta Audience Network and Google Genie, which have been weighing on the stock, appear to be “overblown risks creating a dislocation in APP’s stock ahead what we will expect will be a significant rev beat in Q4,” the analysts added.

On CloudX, Jefferies says it sees “near zero impact,” arguing there has never been a successful standalone mediation platform.

Regarding Meta’s Audience Network, the analysts acknowledge that heavier bidding into iOS traffic could be a challenge, but say they see limited evidence that such pressure is materializing.

As for Google Genie and generative AI-driven gaming content, Jefferies expects new technologies to be incorporated into existing engines, potentially making AppLovin’s distribution more valuable.

Looking to the fourth quarter, the broker expects more upside. Analysts estimate revenues could come in “north of $1.66B in an upside case (implying $60M+ high-end beat),” noting that guidance does not include a holiday spending ramp from new customers.

Surveys of both mobile gaming and e-commerce advertisers were described as positive, with AppLovin already reaching 14% of e-commerce ad budgets among existing customers.

For the first quarter, the analysts expect guidance to imply low-single-digit sequential revenue growth, driven by mid-single-digit gaming growth and conservative assumptions for e-commerce seasonality.

However, this “should be at least partially offset by new advertisers ramping, creating potential upside if new customer contributions more than compensate for seasonality,” they added.

At 15x its FY27 EBITDA estimate versus roughly a 40% five-year CAGR, Jefferies says the current valuation “more than adequately prices in the risks.”

“With underlying fundamentals largely unchanged since the start of the year, the recent pullback offers an opportunity to own a unique growth asset at a compelling entry point,” the analysts concluded.

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