Short Sellers and Analysts Are Waging a War Over This ‘Strong Buy' AI Stock. Should You Buy or Sell Shares Now?
Valued at a market capitalization of $112 billion, AppLovin (APP) is a mobile technology company that helps businesses grow their customer base. Its services include mobile advertising, data analytics, and marketing. The tech stock went public in April 2021 and has since returned close to 400%, crushing broader market returns comfortably. However, it also trades 37% below its all-time highs due to broader market weakness and a couple of short-seller reports.
On Wednesday, Feb. 26, AppLovin stock fell by 12% after two short-seller reports questioned the legitimacy of its AI-powered AXON advertising software, which helped make it the top-performing tech stock of 2024.
Fuzzy Panda called AXON 'the nexus of a House of Cards' built on fraudulent advertising tactics, claiming AppLovin is stealing data from Meta (META) and exploiting consumers and their data in violation of Google (GOOG) (GOOGL) and Apple (AAPL) App Store policies.
Culper Research alleged that AppLovin's gaming success stems from 'systematic exploitation of app permissions' to 'force-feed silent, backdoor app installations.' Meanwhile, AppLovin called the reports 'littered with inaccuracies' and suggested they were timed to prevent the company from responding with financial performance data.
AppLovin Continues to Grow Rapidly
AppLovin announced a strategic pivot to become a pure advertising platform during its Q4 earnings call, revealing plans to divest its entire Apps business for approximately $900 million. CEO Adam Foroughi described the quarter as 'our most foundational period since the AXON upgrade in 2023,' highlighting the company's successful expansion beyond gaming advertisements.
AppLovin reported impressive Q4 results, with total revenue increasing 44% year-over-year to $1.37 billion and adjusted EBITDA growing 78% to $848 million. The Advertising segment generated $999 million in revenue with a 78% adjusted EBITDA margin, while free cash flow reached $695 million, up 105% from the previous year.
AppLovin's platform reaches over 1 billion people daily through mobile games, with engagement times comparable to social networks.
What's Next for the Tech Stock?
AppLovin expects advertising revenue in Q1 to range between $1.03 billion and $1.05 billion, with adjusted EBITDA between $805 million and $825 million. Its management highlighted 'adjusted EBITDA per employee' as a key metric going forward, reporting approximately $3 million per employee in Q4 for the Advertising business.
The strategic shift positions AppLovin to compete more broadly in the global advertising economy. Foroughi expresses confidence that the company is 'building a platform with the potential to transform global marketing.'
Wall Street expects AppLovin to increase sales from $4.70 billion in 2024 to $5.8 billion in 2025. Comparatively, adjusted earnings per share are forecast to expand from $4.53 per share in 2024 to $6.56 per share in 2025. Its free cash flow is expected to grow from $2.1 billion in 2024 to $2.9 billion in 2025.
So, APP stock might seem expensive, priced at 49x forward earnings and 38.6x forward FCF. However, its lofty valuation is supported by strong growth estimates. Of the 19 analysts covering AppLovin stock, 15 recommend 'Strong Buy' and four recommend 'Hold.' The average target price for APP stock is $501.37, indicating upside potential of 55% from current levels.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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