Short-seller reports can significantly affect a company’s stock value. This year, the tech company AppLovin has faced several such reports questioning the legitimacy of its business model. Despite AppLovin’s assertions that it is “building the world’s best advertising AI model,” many investors remain cautious about investing in the stock.
AppLovin has experienced rapid growth in both its revenue and earnings; however, skepticism continues to overshadow its stock. Investors are left wondering if the company can reverse its fortunes this year and if the current dip presents a buying opportunity or if they should stay away.
AppLovin could potentially dispel doubts about its business by delivering strong financial results, including increased sales and improved profit margins. The company’s past success in appealing to growth investors is largely attributed to its accelerating revenue growth.
A notable point in the company’s strategy is its plan to sell its apps business this year. AppLovin derives most of its revenue from its advertising segment, which connects businesses and developers with their target audiences. Meanwhile, its apps business, which includes free-to-play mobile games, primarily earns through in-app purchases. Last year, revenues from the advertising segment rose by 75% to $3.2 billion, whereas the apps business saw a growth of only 3% to $1.5 billion, thereby dampening the overall growth rate. Shifting to an entirely ad-based sales model could enhance AppLovin’s growth metrics.
However, there is a risk that economic factors such as potential trade wars and tariffs introduced by former President Donald Trump could lead to an economic slowdown or recession, prompting companies to cut back on ad spending. Such a scenario would be unfavorable for AppLovin. The trajectory of its growth this year may be more influenced by macroeconomic conditions than by its product offerings.
As of the most recent market close, AppLovin’s shares have declined by 30% year-to-date. This drop has decreased its price-to-earnings multiple from over 100 to 50, which remains high but could be justified if the company’s growth continues. Nonetheless, current market uncertainty and recession fears may dampen investor appetite for high-priced growth stocks. With its price-to-earnings ratio no longer exceeding 100 times its trailing earnings, AppLovin’s stock does not yet present a bargain. Investors purchasing the stock now are banking on substantial earnings growth, yet there is minimal margin of safety if the business fails to meet growth expectations due to decreased ad spending.
For investors who have held AppLovin stock over the past year, the investment has been rewarding, appreciating by about 240% over the past 12 months. However, expectations for a turnaround in the stock’s narrative remain low unless the U.S. economic outlook substantially improves. Unless the tech stock’s valuation falls to a more enticing level, possibly around 30 times earnings, it may be wise to wait, as a recovery for AppLovin’s stock might take some time.
