AppLovin Beats Earnings, but the SEC Investigation Is the Real Story Investors Should Be Watching

Key Points

AppLovin's third-quarter earnings easily exceeded Wall Street's expectations. But an SEC probe of its data gathering practices could limit its near-term gains. Investors should see if that investigation impacts its core Axon platform. 10 stocks we like better than AppLovin ›

AppLovin(NASDAQ: APP) posted its third-quarter earnings report on Nov. 5. The adtech company's revenue surged 68% year over year to $1.41 billion and exceeded analysts' expectations by $70 million. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 90% to $1.16 billion, while its earnings per share (EPS) rose 96% to $2.45 and cleared the consensus forecast by $0.06.

Those year-over-year growth rates notably exclude its mobile gaming business, which it sold to Tripledot Studios this July, from both periods. On a sequential basis, it expects its revenue to rise 12% to 14% in the fourth quarter as its adjusted EBITDA increases 11% to 14%.Image source: Getty Images.

That outlook also surpassed analysts' estimates, but the ongoing Securities and Exchange Commission (SEC) probe of its data collection practices likely capped its post-earnings gains. Let's see how that investigation might impact AppLovin's business and weigh down its stock.

How did AppLovin evolve over the past three years?

AppLovin was originally a mobile game publisher. But in 2022, it acquired the mobile adtech company MoPub and the connected TV advertising company Wurl to expand its digital advertising business. In 2023, it launched its artificial intelligence (AI)-powered Axon ad discovery platform. As it helped more mobile developers monetize their apps, its growth accelerated.

AppLovin subsequently expanded its advertising ecosystem into non-gaming markets (like e-commerce marketplaces and connected TV services), and launched a new self-service platform that allowed advertisers to manage their own ad campaigns. That AI-driven advertising business became its core growth engine and offset the sluggish growth of its legacy gaming business. That's why it sold its entire mobile gaming business for $400 million in cash last year.

It even placed a bid to buy TikTok's international business from ByteDance earlier this year, but it could struggle to outbid bigger potential suitors like Amazon, Microsoft, and Oracle (which already hosts TikTok's U.S. user data). The SEC probe could also hurt its chances of winning that bid.

Why is the SEC investigating AppLovin?

Over the past year, several prolific short-sellers claimed AppLovin's data collection strategies violated app store policies. They accused it of impermissibly pulling user IDs from other apps run by Alphabet's Google, Meta Platforms, Snap, TikTok, Reddit, and others to craft its own targeted ads. Most of those allegations targeted its AI-driven Axon platform.

Story Continues

AppLovin denied those allegations, but its stock stumbled in early October after Bloomberg claimed the SEC was probing its data collection services. In its latest 10-Q filing, it admitted that if those claims are successful, its "business, financial condition, and results of operations could be adversely affected." It warns that even if those claims are eventually resolved in its favor, the costs of defending itself "could divert the resources of our management and our board of directors" and throttle its growth.

Why do investors need to keep an eye on the SEC probe?

From 2024 to 2027, analysts still expect AppLovin's revenue and adjusted EBITDA to grow at a CAGR of 27% and 42%, respectively. Most of that growth should be driven by Axon's AI-powered targeted ads and its self-service advertising platform. With an enterprise value of $209 billion, AppLovin trades at 28 times next year's revenue and 34 times its adjusted EBITDA. Those valuations seem reasonable, but they're pinned to the expectations that Axon's AI-powered adtech platform will expand and evolve.

But if the SEC probe escalates into a full-blown lawsuit, AppLovin's valuations will likely decline as the regulators cast dark clouds over Axon's future. AppLovin's insiders sold more than 4 times as many shares as they sold over the past three months, and that chilly insider sentiment suggests that its shares could remain under pressure for the foreseeable future. AppLovin could still have a lot of long-term growth potential, but investors shouldn't go all-in on its stock until it fully addresses these issues. That said, it might still be worth nibbling on as a speculative play on the secular expansion of the AI-powered adtech market.

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Leo Sun has positions in Amazon and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

AppLovin Beats Earnings, but the SEC Investigation Is the Real Story Investors Should Be Watching was originally published by The Motley Fool

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