Before we dive into this week’s idea, we need to address our Gap (GPS) position as the stock closed below our short strike price on Friday. What this means is the February 20 call that we sold for $1.42 expired worthless, and we are left with our stock position.
Because the market has gotten a touch rocky in the last week, let’s sell our stock position today, and move that capital into fresher ideas.
To execute this trade you need to:
Sell your GPS Stock.
Moving on …
As traders grappled with the moves in the bond market last week (expectations of rate cuts coming soon have faded), the market moved violently day-to-day, though big picture the indexes were mixed. By week’s end the S&P 500 had fallen 0.35%, the Dow was mostly unchanged, and the Nasdaq had lost 1%.
The Stock – AppLovin (APP)
Why the Strength
AppLovin’s mobile platform enables developers of all sizes to market and publish their apps while advertising their offerings to potential new customers. The company also offers internet-based TV marketing and owns a growing mobile game development business.
But its software platform is the main attraction here (nearly 60% of revenue), and it’s capturing Wall Street’s attention with its eye-popping growth—thanks in large part to a new artificial intelligence-powered advertising engine. A major institution just upped its share price target for the stock in the wake of the new AI-based ad service, the AXON 2.0, which it said is “driving more efficient ad spending for AppLovin’s clients,” most of which are in the mobile gaming industry, by using predictive machine learning to target app-install ads to users most likely to download those apps.
Last week, the company’s rapid growth was highlighted in the Q4 report, which featured consensus-beating revenue of $953 million that increased 36% from a year ago, plus earnings of 49 cents that beat estimates by 40%. Software platform sales grew 88% to $576 million, while segment-adjusted EBITDA soared 126% to $420 million (a 73% margin). The firm’s apps portfolio also performed well in Q4, with 5% growth from the prior quarter while maintaining a consistent 15% adjusted EBITDA margin. Management attributed the stellar results to growth in the mobile advertising market, the expansion of its advertiser base, higher advertising budgets and a market shift to real-time bidding. For Q1, the top brass guided for revenue of $965 at the midpoint (up 35% if realized) and adjusted EBITDA of $485 million (up 77%).
Going forward, the company believes its free cash flow generation and share management will produce long-term value for shareholders, and to that end, just increased its share repurchase authorization by $1.3 billion. Analysts see a sizable bottom-line jump (average estimated increase of 150%) for 2024.
Technical Analysis
APP was the dog’s dinner in 2022, falling from a high of almost 100 at the start of that year to a low of 10 by the end of it. But the release of its AI-powered ad service helped dig the stock out of the doldrums in 2023, with shares turning the corner in the spring. APP met resistance at 45 last summer and spent several months building a high-level base while the 200-day line caught up. Last week’s earnings broke the stock out of the base on monster volume, with the start of this week seeing a minor (and normal) pullback. Stop — 48
The Covered Call Trade
Buy AppLovin (APP) Stock at 57, Sell to Open March 57.5 Strike Calls (exp. 3/15) for $2.50, or a Net Price of 54.5 or less
Static Return: $250 per covered call (4.58%)
Breakeven: 54.5
Covered Call Return (if assigned): $300 per covered call (5.50%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 54.5 or less. (In this case, 57 minus 2.50 = 54.50. Or another example is you could pay 56.65 for the stock and sell the call for 2.15, which also equals 54.50.)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on February 27, 2024.
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