AppLovin’s Strong Q1 Results Defy Short-Seller Doubts

AppLovin (NASDAQ: APP) has encountered significant scrutiny this year, facing three notable short-seller reports. Despite these challenges, the company reported impressive first-quarter results, leading to a nearly 288% stock price increase over the past year.

Short-Seller Reports Raise Concerns

The reports, from Fuzzy Panda Research, Muddy Waters, and Culper Research, question the effectiveness of AppLovin’s AI adtech platform, Axon 2.0. Allegations include violations of user privacy and unauthorized app installations, which could threaten the platform’s availability in app stores.

AppLovin Responds to Allegations

CEO Adam Foroughi has denied the claims, urging investors to conduct their own research. He suggested that the complexity of Axon 2.0 allows short sellers to generate fears and doubt, adding that AI chatbots could easily counter these claims.

Impressive Financial Performance in Q1

The short reports did not hinder AppLovin’s Q1 growth. The advertising segment revenue surged 73% to $1.16 billion, while total revenue increased by 40% to $1.48 billion, exceeding the $1.38 billion consensus from LSEG.

Revenue from its Apps portfolio, however, decreased 14% year over year to $325 million. Despite this, segment-adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose by 9% to $62 million. Furthermore, AppLovin is in the process of selling its mobile gaming business to Tripledot Studio for $150 million in cash, a $250 million secured promissory note, and a nearly 20% equity stake in the company.

Profitability and Cash Flow Growth

Gross margins improved to 81.7%, up from 72.2% a year ago. The company successfully reduced its sales and marketing costs by 19% year over year, contributing to faster growth in profitability metrics compared to revenue. This combination of increasing revenue and lower expenses is uncommon in the industry.

AppLovin’s earnings per share (EPS) rose dramatically from $0.67 last year to $1.67, surpassing the projected $1.45. Despite incurring a $189 million non-cash goodwill impairment charge tied to the sale of its Apps portfolio, EBITDA increased by 82% to $1 billion, while advertising-adjusted EBITDA rose 92% to $943 million.

The company generated $832 million in operating cash flow and $826 million in free cash flow, ending the quarter with $3.2 billion in net debt.

Looking Ahead to Q2

For Q2, AppLovin forecasts advertising revenue between $1.195 billion and $1.215 billion, representing growth of 68% to 71%. The company anticipates advertising-segment adjusted EBITDA of $970 million to $990 million, a significant increase from $520 million a year ago.

Exploring New Advertising Ventures

AppLovin is optimistic about its entry into web-based advertising, currently serving less than 0.1% of the potential market. They are set to launch a self-service dashboard aimed at mid-market web advertisers, allowing customers to set objectives and let the system automate results. The company believes web-based advertising could account for 10% of its advertising net revenue this year.

Valuation Perspectives

Despite the significant annual gain, AppLovin remains attractively valued. With a forward price-to-earnings (P/E) ratio around 41 based on 2025 analyst estimates, the price/earnings-to-growth (PEG) ratio is only 0.5, indicating potential undervaluation.

A continued rapid growth trajectory in both revenue and earnings makes AppLovin attractive, particularly if it successfully expands into e-commerce advertising.

Evaluating Short-Seller Claims

The short-seller reports have yet to provide concrete evidence of wrongdoing. Given the stringent privacy standards of major companies like Apple, it’s unlikely that AppLovin would violate app store policies without consequence.

While caution is warranted based on the multiple short reports, the ongoing growth and favorable valuation could warrant a speculative investment in AppLovin.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.