AppLovin stock has moved horizontally in the past two months as demand has remained in a tight range. It has remained within the narrow range of between the support and resistance levels of $297 and $352 in this period. A closer look shows that it has formed an island reversal pattern, pointing to a rebound.
AppLovin stock price technicals suggest a rebound is possible
The daily chart shows that the APP stock has crashed in the past few months. It has slumped by 60% from its all-time high, erasing billions of dollars in value.
The stock has plunged below all moving averages and formed a death cross pattern on July 15 as the 50-day and 200-day Exponential Moving Averages (EMA) crossed each other.
AppLovin has also slowly formed a horizontal channel, which is part of the island reversal pattern. This pattern is made up of a channel that forms after an asset gaps down. An island reversal usually tends to rebound.
The Relative Strength Index (RSI) and the Percentage Price Oscillator (PPO) have continued rising, a sign that it has formed a bullish divergence.
Therefore, there is a likelihood that the stock will rebound as investors attempt to fill the gap that formed after its earnings report. If this happens, the stock will rebound, potentially to the key resistance level of $400.
On the flip side, a drop below the year-to-date low of $297 will invalidate the bullish outlook. If this happens, the next level to watch will be at $250.
Another concept that may lead to a rebound is the Wyckoff Theory, which identifies the four stages that an asset goes through: accumulation, markup, distribution, and markdown. In this case, it is in the accumulation stage, which may lead to a rebound.
AppLovin may implement a turnaround
APP stock crashed after the last financial results, which were lower than what analysts were expecting. The results were also lower than what management guided in terms of the top line and the bottom line. In his statement, management said:
“We delivered almost $2 billion in revenue, which was just below the midpoint of our guidance range, and our Adjusted EBITDA was just below the range. We’ve always managed this business with the goal of outperforming our own expectations. And this quarter, we fell short of that standard.”
The report pushed more analysts to slash their targets. Morgan Stanley slashed the target from $650 to $450, while BTIG slashed from $408 to $396. Also, Evercore cut the target from $630 to $510, while Needham dropped from $500 to $475.
On the positive side, management identified the reason for the weakness and hinted that the actions were improving. The CEO noted that he had identified the challenge in gaming, its biggest business, and implemented measures.
Even so, analysts expect the company’s business to show that its revenue rose by 47% this quarter to $2.07 billion. They also expect the earnings-per-share to move from $2.45 to $4.03. For the year, the company’s EPS is expected to move from $9.75 to $15.67.
The company has also become highly undervalued, with its forward price-to-earnings (PE) ratio moved to 18, much higher than the sector median of 13. This multiple is also much higher than the five-year average of 29. As such, the technicals and fundamentals suggest that it may rebound soon.