2 Reasons Why AppLovin Has a Lot to Prove on May 7

Jon Quast, The Motley Fool

Thu, May 1, 2025, 10:30 AM 5 min read

• Some investors question AppLovin's growth and whether it can be sustained.

• AppLovin will report financial results on May 7 and the report could either confirm fears or lay them to rest.

Whenever a stock story is told, the timeframe of that story can make a big difference. For example, AppLovin (NASDAQ: APP) stock is down more than 40% from highs in 2025, which paints a negative picture. But it's also up more than 600% in just the last three years, which is stellar. That said, what happens from here could have a lot to do with what happens on May 7.

On May 7, AppLovin is scheduled to report financial results for the first quarter of 2025. Under ordinary circumstances, investors would do well to not overemphasize a single quarter of financial results. But for this advertising technology (adtech) company, these are not ordinary circumstances.

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These aren't ordinary circumstances for AppLovin for two reasons. First, the stock has an expensive valuation of 20 times sales, valuing the company at nearly $100 billion. In other words, investors' expectations are absolutely sky-high.

Second, AppLovin's entire business has been called into question by various short sellers in recent months -- investors who will make money if the stock goes down. This injects a fair bit of fear and doubt into the investor community.

The combination of a high valuation and an elevated sense of fear creates a potentially volatile situation. When it reports Q1 results, AppLovin has an opportunity to prove itself to investors or it may confirm fears that were stoked by the short sellers. Therefore, I believe it's fair for investors to expect a big move on May 7, one way or the other.

In 2024, roughly two-thirds of AppLovin's revenue came from the advertising side of its business. This part of the business generated more than $3 billion in full-year revenue last year and it's grown at a nearly 100% compound annual growth rate since the end of 2020. That's not a typo -- growth has been extraordinary.

The extraordinary growth is why AppLovin stock has a pricey valuation -- investors believe it deserves to be highly valued. But the growth rate is precisely why the business has become a target. Short sellers question the authenticity and the sustainability of the growth.

AppLovin's software displays in-app advertisements intended to monetize the app displaying the ad and also intended to help new apps get discovered. But short sellers allege that not all clicks on its ads are genuine. Moreover, the allegations also question whether AppLovin is violating policies for mobile operating systems, which risks its software getting banned.