Up Over 700% This Year, Has AppLovin Stock Finally Reached a Peak?

AppLovin (NASDAQ: APP) is a software company that surged in value this year. Its platform can help businesses monetize games, and there may be an even bigger opportunity ahead in e-commerce. Investors appear to be buying up the growth story in droves, with shares of AppLovin going parabolic and hitting all-time highs this year.

But has the bullishness gotten too far ahead of itself? Has the stock peaked, or could there still be more upside left for investors who buy shares of AppLovin today?

Why has AppLovin been such an amazing stock this year?

Shares of AppLovin are up more than 700% this year as the stock took off in recent months. And if you look at the company's impressive growth, there's little wonder why investors have become so bullish on it.

APP Operating Revenue (Quarterly YoY Growth) data by YCharts. YoY = year over year.

The software company has a platform that helps monetize mobile games and enables businesses to grow their audiences. Revenue for the quarter that ended in September totaled just under $1.2 billion and rose by 39% year over year. But what's even more incredible is the bottom-line growth, with AppLovin's earnings jumping from $108 million a year ago to $434 million this past quarter.

The company's net margin has improved considerably, from 13% to 36%. This fantastic improvement puts the company in an excellent position to generate even more profit growth in the future.

Has AppLovin stock become too expensive?

The phenomenal growth AppLovin achieved has put its market cap above the $100 billion mark. Investors who buy the stock today will have to pay 99 times its trailing earnings to own a piece of the business. Even based on analyst projections of next year's profits, investors are paying a multiple of 47. The stock is also trading at 27 times its revenue.

Whatever way you slice it, if you want to buy the stock, you'll have to pay significantly for it. But that shouldn't come as much of a surprise, given how well the business has grown of late.

And with AppLovin looking at using its software in e-commerce and that becoming a key part of its future growth strategy, there's optimism that the growth rate could accelerate even further. CEO Adam Foroughi says that e-commerce "is looking so strong that it's something that we think will be impactful to the business financially in 2025 and then for the long-term."

Unfortunately, with such a high valuation, investors are essentially paying for a lot of that future growth already. The risk is that if the ad market softens or economic conditions take a turn for the worse next year, the numbers may be a bit underwhelming.

Is AppLovin stock worth the premium?

AppLovin has a lot of potential growth ahead, and it may prove to be worth its massive premium, but it's too early to know that just yet. A lot depends on how well it does in e-commerce; investors may want to take a wait-and-see approach with the business to see just how lucrative it proves to be before making a buying decision.

The risk is that with such an expensive valuation, a lot of growth and bullishness is already priced into AppLovin's stock price, which means expectations will also be high. If AppLovin fails to impress in future quarters, it could be vulnerable to a significant sell-off.

Ultimately, the safest option may be for investors to wait on the sidelines for now. With the markets being as hot as they are and AppLovin being among the best growth stocks this year, investors may want to hold off on buying the tech stock for now. Although there could still be more room for the stock to rise higher, a lot may need to go right for that to happen and for it to sustain a higher valuation over the long run.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AppLovin. The Motley Fool has a disclosure policy.