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Recently, a class action lawsuit against AppLovin has spurred investor anxiety, reflecting in the company's share price sliding 16% this past quarter. The allegations of unethical practices and misleading financial reporting have clouded the impressive revenue and income growth stated in their Q4 2024 earnings. Compounding these worries, market-wide declines, notably in tech stocks, have exacerbated the situation. Despite AppLovin's robust earnings and share buyback initiatives, the combination of legal challenges and broader economic concerns, including anticipated tariffs and weak investor sentiment, have impacted its stock heavily amid a tech sector generally under pressure.

We've identified 3 possible red flags with AppLovin and understanding the impact should be part of your investment process.

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AppLovin's total return on shares, including dividends, surged an impressive 371.41% over the last three years. This growth trajectory stands in stark contrast to the wider market and showcases substantial earnings and revenue advancements relative to peers. Despite recent legal challenges, during much of this period, AppLovin's strategic focus on expanding into global advertising and boosting operational efficiency fueled significant growth. This transition has allowed them to tap into a larger market, moving beyond their initial gaming focus.

Key actions such as the aggressive share repurchase initiatives, including a recent buyback totaling US$1.17 billion for close to 3.87 million shares, demonstrate their commitment to shareholder value. The successful execution of a shift towards high-margin advertising, enhanced by automation and AI advancements, reflects a concerted effort to solidify financial stability. Additionally, AppLovin's addition to the NASDAQ-100 Index in November 2024 further highlights market confidence in its evolving business model.

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In light of our recent valuation report, it seems possible that AppLovin is trading behind its estimated value.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.