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

AppLovin reported robust third-quarter results, with revenue surging 68% year-over-year to $1.41 billion and adjusted EBITDA up 90%, significantly surpassing analyst estimates, and offered a strong Q4 outlook. Despite this strong performance and its successful pivot to AI-powered adtech via its Axon platform, an ongoing SEC probe into its data collection practices, accused of violating app store policies, is capping post-earnings gains and poses a material risk to its future growth trajectory and valuations.

Analysis

AppLovin (APP) reported robust Q3 2023 results, with revenue surging 68% year-over-year to $1.41 billion, exceeding analyst expectations by $70 million. Adjusted EBITDA grew 90% to $1.16 billion, and EPS rose 96% to $2.45, beating consensus by $0.06. The company also provided a strong Q4 outlook, projecting sequential revenue growth of 12-14% and adjusted EBITDA growth of 11-14%, both surpassing estimates.

This strong performance is underpinned by AppLovin's successful pivot to an AI-powered adtech model, centered around its Axon platform, which is now its core growth engine. Analysts anticipate a 27% revenue CAGR and 42% adjusted EBITDA CAGR from 2024-2027, primarily driven by Axon, supporting a seemingly reasonable valuation of 28x next year's revenue and 34x adjusted EBITDA.

Despite strong fundamentals, an ongoing SEC probe into AppLovin's data collection practices, specifically regarding alleged violations by its Axon platform, is significantly capping post-earnings gains. The company's 10-Q filing acknowledges potential adverse effects on its business if claims are successful, with defense costs also posing a risk to growth and valuations.

The cautious sentiment is further exacerbated by insider selling, with over four times more shares sold in the past three months, suggesting potential sustained pressure on the stock. While AppLovin exhibits long-term growth potential in AI-powered adtech, the unresolved SEC investigation creates a material overhang impacting strategic initiatives and investor confidence.

Key Decisions for Investors

• Investors should closely monitor the SEC probe's developments, as its resolution or escalation will be a primary determinant of AppLovin's stock performance and future growth trajectory.
• Evaluate the risk/reward profile by weighing the strong underlying AI-powered adtech growth against the material legal and reputational risks posed by the ongoing investigation.
• Consider a cautious or speculative approach, potentially initiating smaller positions to capitalize on long-term AI adtech expansion while maintaining flexibility to adjust based on regulatory clarity and insider sentiment.