Investors are cheering AppLovin Corp (NASDAQ: APP) this morning following an announcement that it will replace MarketAxess Holdings on the benchmark index on September 22nd.
The milestone marks a major validation of the company’s business model and growth trajectory in the super competitive ad-tech space.
Plus, joining the S&P 500 typically boosts demand from passive funds and institutional investors, often driving the stock price higher as well.
Still, former hedge fund manager, Jim Cramer, recommends trimming exposure to AppLovin stock that’s currently trading more than 140% above its year-to-date low in the first week of April.
Why Cramer favours trimming exposure to AppLovin stock
APP stock sure has been a major outperformer this year, but the Mad Money host is urging caution, especially for those interested in buying it on the index inclusion announcement.
“I don’t want you to buy more. As a matter of fact, it’s up 50% – let’s take a little off the table just to be prudent,” he told a caller in the latest segment of his CNBC show.
Cramer’s concerns stem from AppLovin shares’ stretched valuation.
At the time of writing, they’re going for more than 55 times forward earnings – a multiple that even exceeds the one on NVDA stock.
The famed investor agreed that index inclusion is often bullish in the short term, but said much of the related optimism may already be priced into AppLovin shares at current levels.
Therefore, for investors sitting on sizable gains, cutting exposure to the ad-tech specialist could be a smart move to lock in profits and reduce risk, he concluded.
Does that mean Cramer is bearish on APP shares?
Investors should note that Cramer’s seemingly dovish remarks on AppLovin stock do not reflect pessimism – just prudence.
He’s consistently praised the company’s operational strength and free cash flow generation. “It’s a monster stock and it’s very well run,” he said recently.
Additionally, the Nasdaq-listed firm’s fundamentals remain strong, with an exciting 77% revenue growth in the latest reported quarter as its adtech platform continued to gain traction among mobile developers.
Expectations are for AppLovin’s earnings to soar nearly 86% on a year-on-year basis in its current quarter — and the company’s recent bid to acquire TikTok’s US operations underscores its ambition.
In short, strategic partnerships and aggressive expansion have positioned APP shares as a key player in digital advertising.
Cramer’s suggestion to trim is about managing exposure – not abandoning a stock he still considers a standout performer in the tech space.
How Wall Street recommends playing AppLovin stock
S&P 500 inclusion is a major achievement for AppLovin shares, reflecting the company’s rise from a niche ad-tech player to a large-cap tech contender.
But with the stock already up sharply and trading at premium multiples, investors may be better off heeding Cramer’s advice.
Meanwhile, Wall Street firms also recommend caution in buying APP stock at current levels. While the consensus rating on it remains at “overweight”, the mean target of about $514 actually indicates potential “downside” of roughly 5.0% from here.
Therefore, for now, trimming exposure could be prudent in a market that rewards momentum – but punishes excess.
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