Advertising tech firm AppLovin(NASDAQ: APP) saw its stock soar over the past year. Shares skyrocketed nearly 300% over the past 12 months.
But this hot stock has been on the decline since it peaked in February, when it hit a 52-week high of $525.15. A handful of short-seller reports disparaging the company surfaced in recent weeks, the latest coming out on March 27. As a result, in 2025, shares are down nearly 16% at the time of this writing.
Does the price drop create an opportunity to grab shares, or should you stay away, as the short-sellers suggest? To answer that question, here's a deeper look.
AppLovin's meteoric rise
Before diving into the short-seller allegations, some background is necessary, starting with the astronomical ascent in AppLovin's share price. This was thanks to the company's stellar performance last year. Its 2024 sales totaled $4.7 billion, a 43% increase over 2023.
Not only did sales see strong growth, the bottom line also increased 343% in 2024 to $1.6 billion. Helping the company achieve this net income growth was its excellent gross margin of 75%.
The strong performance doesn't end there. It also generated impressive free cash flow (FCF) of $2.1 billion last year. FCF indicates the cash available to invest in the business, repurchase shares, and pay down debt.
AppLovin makes its revenue from digital advertising, primarily through mobile gaming apps. The company saw meaningful income from e-commerce advertisers. Those ad sales were encouraging, since management is working to expand revenue from industries outside the gaming segment.
AppLovin's potential downsides
Against this backdrop, several short-sellers emerged to claim AppLovin's success was driven by questionable business practices. A March 27 short-seller report by Muddy Waters Research claims the company misused consumer data and inflated its e-commerce achievements. Earlier short-seller reports accused it of advertising fraud. None of these allegations had been proved at the time of this writing.
That said, whether the company's e-commerce sales signal sustained growth in this segment, or if it's a seasonal blip from holiday shopping, won't be known until first-quarter results are disclosed later this year. So, investors should take its triumphs outside gaming with a grain of salt.
Adding to AppLovin's challenges capturing markets outside of gaming is a lack of online self-service tools needed for its business to scale. It's focusing this year on developing these capabilities, but how well it succeeds, and how much it adds to revenue growth, is unknown.
Another factor to be aware of is its debt. Exiting 2024, debt represented $3.5 billion of the company's $4.8 billion in total liabilities. That amount is an increase over the $3.1 billion in debt it held at the end of 2023. Increasing debt is not a desirable trend.
To buy or not to buy AppLovin stock
Although the short-seller accusations are concerning, they are unproven at this time, so a decision to invest in AppLovin should be based on its business performance.
To date, that performance has been stellar for the most part, making it a worthwhile investment. So now, the question is whether the share price decline over recent weeks makes the stock a buy at this time.
To assess this, here's a comparison of AppLovin's stock valuation to competitors in the digital ad industry. Let's use the forward price-to-earnings ratio (P/E) for this, which tells you how much investors are willing to pay for a dollar's worth of earnings based on estimates for the next 12 months.
As for the competitors, the company's mobile-games dominated advertising platform puts it up against the likes of Unity Software, which offers advertising services for gaming apps. AppLovin's aspirations to expand beyond gaming also puts it at odds against businesses already servicing such advertisers, including The Trade Desk. This is how AppLovin's forward P/E stacks up against these competitors.
Its forward earnings multiple is around the same as its competitors, especially since recent stock market volatility and the short-seller attacks caused its stock to fall. This suggests its shares are fairly valued at the time of this writing.
However, short-seller accusations aside, AppLovin's long-term sales growth depends in part on capturing advertising dollars beyond the gaming category. Since its ability to do so is still unknown, you may want to wait for its first-quarter results to assess how this part of its business is doing before deciding to buy shares.
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Robert Izquierdo has positions in The Trade Desk and Unity Software. The Motley Fool has positions in and recommends AppLovin, The Trade Desk, and Unity Software. The Motley Fool has a disclosure policy.
