AppLovin Dips on S&P 500 Snub, Morgan Stanley Lifts Target Anyway

AppLovin shares fell over 8% on June 9th after the company was excluded from the S&P 500 index, disappointing investors who anticipated increased exposure to institutional buying; however, Morgan Stanley upgraded its price target for AppLovin from $420 to $460, citing the expected benefits from the sale of its first-party gaming business, which is projected to improve margins by focusing on its high-margin ad-tech platform. Despite the S&P 500 exclusion, analysts believe AppLovin's eventual inclusion remains likely given its large market capitalization, and Morgan Stanley's upgrade suggests continued bullish sentiment on the company's long-term prospects.

Analysis

AppLovin (NASDAQ: APP) experienced a significant share price decline of over 8% on June 9, closing at $383.61, following the announcement by S&P Global (NYSE: SPGI) that the company would not be added to the S&P 500 Index. This exclusion negated anticipated benefits of increased investor exposure, particularly from large institutional funds like BlackRock (NYSE: BLK) and State Street (NYSE: STT) that track the index, leading to immediate selling pressure despite the stock's approximately 1,840% appreciation over the past two years as of the June 9 close. However, this development does not inherently reflect a weakening of AppLovin's core business, and its eventual inclusion in the benchmark remains probable, given it is one of only two U.S. stocks with a market capitalization exceeding $100 billion (alongside MicroStrategy, NASDAQ: MSTR) not currently in the index; AppLovin's strong advertising technology segment, which generated over $3.7 billion in sales over the last twelve months, further supports this expectation. Concurrently, Morgan Stanley (NYSE: MS) issued a positive outlook, upgrading AppLovin's price target from $420 to $460, implying a 20% upside from its June 9 closing price. This optimism stems from the strategic sale of AppLovin's first-party (1P) mobile game studios, a deal announced in May and expected to close in Q2. The divestiture is anticipated to enhance AppLovin's overall value and improve profit margins by allowing the company to focus on its high-margin advertising technology platform, which will likely continue to serve the sold studios, thereby retaining ad revenue without the associated operational costs. Although Morgan Stanley revised its EBITDA estimates downwards, it projects a higher EBITDA multiple, supporting a higher valuation for AppLovin post-restructuring.

Key Decisions for Investors

• Investors should assess AppLovin's valuation in light of its strong ad-tech segment and the anticipated margin benefits from its gaming division sale, potentially viewing the recent S&P 500 exclusion-driven dip as a distinct event from core business performance.
• Closely monitor the completion of the first-party gaming business sale in Q2 and subsequent financial reports for evidence of the anticipated margin improvements and validation of Morgan Stanley's higher EBITDA multiple thesis.
• Consider the current price level post-drop as a potential entry point if aligning with Morgan Stanley's bullish thesis, which implies approximately 20% upside to the $460 price target, while acknowledging the stock's high P/E ratio of 84.50 and its significant prior appreciation of around 1,840% over the past two years.
• Factor in the high probability of eventual S&P 500 inclusion as a potential future catalyst, given AppLovin's substantial market capitalization and business scale, and remain attentive to future index rebalancing announcements.