TLDR
- AppLovin reported Q3 revenue of $1.41 billion, up 68% year-over-year, beating analyst estimates by $70 million and posting adjusted EPS of $2.45.
- The SEC is investigating AppLovin’s data collection practices, examining whether the company violated app store policies by pulling user IDs from competing platforms.
- Q4 guidance calls for revenue growth of 12% to 14% sequentially, with adjusted EBITDA projected to increase 11% to 14%.
- Insider selling increased more than 4x compared to the previous three months, with institutional holders like Metis Global Partners and Lakeridge Wealth Management recently disclosing stake sales.
- The stock dropped over 10% following renewed attention to the regulatory probe, despite strong earnings results.
AppLovin posted third-quarter results that crushed Wall Street expectations. Revenue hit $1.41 billion, up 68% from the same period last year.
The company beat analyst estimates by $70 million. Adjusted EBITDA jumped 90% to $1.16 billion.
Earnings per share came in at $2.45, clearing the consensus forecast by six cents. That represented a 96% increase year-over-year.
These growth rates exclude the mobile gaming business AppLovin sold to Tripledot Studios in July. The $400 million cash sale allowed the company to focus on its core advertising technology.
For the fourth quarter, AppLovin expects revenue to grow 12% to 14% sequentially. Adjusted EBITDA should increase 11% to 14%.
That guidance also topped analyst projections. But the stock still dropped over 10% following the earnings release.
The SEC Problem
The Securities and Exchange Commission is investigating AppLovin’s data collection practices. The probe examines whether the company violated app store policies.
Short-sellers have claimed AppLovin pulled user IDs from other apps without permission. These apps allegedly included platforms run by Google, Meta Platforms, Snap, TikTok, and Reddit.
The accusations focus on AppLovin’s AI-powered Axon platform. Axon is the company’s core advertising discovery tool that drives most of its recent growth.
AppLovin has denied the allegations. However, in its latest 10-Q filing, the company acknowledged potential risks.
If the claims prove successful, AppLovin warned its business and financial results could be “adversely affected.” Even defending against the claims could divert management resources and slow growth.
Bloomberg first reported the SEC probe in early October. The news sent the stock lower at the time.
How AppLovin Got Here
AppLovin started as a mobile game publisher. In 2022, it acquired mobile adtech company MoPub and connected TV advertising company Wurl.
The company launched Axon in 2023. The AI-powered platform helps mobile developers monetize their apps through targeted advertising.
AppLovin later expanded into non-gaming markets. This included e-commerce marketplaces and connected TV services.
The company also launched a self-service platform. This tool lets advertisers manage their own campaigns directly.
These advertising services became the main growth engine. The legacy gaming business couldn’t keep up.
That’s why AppLovin sold its entire mobile gaming division last year. The company even placed a bid to buy TikTok’s international business from ByteDance earlier this year.
Insider Activity Raises Eyebrows
Insider selling at AppLovin increased more than fourfold over the past three months. That’s compared to the previous three-month period.
Institutional holders are also heading for the exits. Metis Global Partners and Lakeridge Wealth Management recently disclosed stake sales.
The selling comes despite strong operational performance. Revenue continues to grow at a rapid pace.
Analysts still expect solid growth ahead. From 2024 to 2027, revenue should grow at a compound annual rate of 27%.
Adjusted EBITDA is projected to grow 42% annually over the same period. Most of that growth depends on Axon’s continued expansion.
AppLovin currently trades at 28 times next year’s revenue. The stock also trades at 34 times adjusted EBITDA.
These valuations assume Axon will keep growing. But the SEC probe casts doubt on that assumption.
Current Status
The company has discontinued certain controversial tools in response to scrutiny. State attorneys general have also begun examining AppLovin’s practices.
AppLovin’s core AI advertising growth story remains intact for now. The company continues to add new advertisers to its platform.
Short-seller activism has added pressure to the stock. These reports have combined with regulatory concerns to outweigh the earnings beat.
Platform relationships could suffer if the investigation escalates. Apple and Google might restrict AppLovin’s data access as a precaution.
The regulatory overhang has prompted a valuation reset. Risk perceptions among institutional holders have increased.
AppLovin faces persistent regulatory scrutiny while posting strong quarterly results and maintaining positive analyst coverage from Wall Street firms.
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