AppLovin's 50% Drop Highlights Overvaluation and Unproven Growth Amid Regulatory Risks

What happened

AppLovin's stock has fallen about 50% from recent highs, a decline that Seeking Alpha warns is not a temporary dip but a signal of underlying issues. Despite the correction, the company remains priced for aggressive growth, with consensus estimates assuming sustained double-digit revenue and EPS compounding, yet its margin expansion story appears largely realized. Future growth now hinges on unproven expansions into new advertiser segments like e-commerce and AI-driven initiatives, which have not yet materialized significantly. Valuation remains premium at approximately 27x forward PE, failing to fully account for cyclical ad-tech risks and regulatory overhangs. This aligns with DeepValue's 'POTENTIAL SELL' rating, which emphasizes high multiples, ongoing SEC investigations, and the need for flawless execution to justify current prices.

Implication

The 50% stock drop underscores the vulnerability of AppLovin's premium valuation, which assumes continued hyper-growth and 80%+ EBITDA margins despite regulatory headwinds. Ongoing SEC and state probes into data practices threaten the core business model, potentially leading to fines and operational restrictions that could compress margins. Future growth is heavily reliant on successful expansion into e-commerce and AI, but these initiatives lack concrete evidence of scaling, raising execution risks. With the stock still trading at high multiples, any disappointment in growth or adverse regulatory news could trigger further multiple compression and capital loss. Therefore, investors should wait for regulatory clarity or a more attractive entry point that prices in these risks before considering exposure.

Thesis delta

The new article reinforces DeepValue's existing cautious thesis by highlighting that the recent price decline is a structural warning rather than a buying opportunity. It emphasizes that even after the correction, valuation remains stretched and growth assumptions are optimistic, aligning with the report's view of asymmetric downside risk from regulatory and execution challenges. No significant shift is needed, but it underscores the urgency of monitoring regulatory outcomes and the progress of growth initiatives for any thesis adjustments.