Over the past year, AppLovin's (NASDAQ:APP) stock has surged approximately 650% at the time of this writing, prompting value investors to examine whether market speculation is driving the share price. With a P/S ratio above 30 and a three-year revenue growth rate of 18.5%, the companys valuation appears susceptible to correction as growth stabilizes. While its short-term speculative appeal may persist, value investors will likely avoid the stock. In a bullish scenario, the share price could rise to $700 within two years, yet in a bearish scenario it could revert to current levels by December 2026, reflecting considerable volatility.

Operations and financials

• Warning! GuruFocus has detected 3 Warning Sign with APP.

In February 2025, AppLovin announced plans to sell its mobile gaming division for $900 million$500 million in cash and $400 million in the buyers stock. This divestiture, expected to close in the next quarter, will enable AppLovin to concentrate on its core advertising platform. Management has heavily invested in an AI-driven advertising model that refines ad targeting and personalization for mobile game users, while also establishing the companys presence in emerging sectors such as e-commerce and connected-TV advertising.

This strategic pivot appears especially prudent given that, in 2024, advertising accounted for 68% of AppLovins revenue and nearly 90% of its adjusted EBITDA, with a 76% EBITDA margin. By contrast, the companys apps segment generated $1.485 billion in revenue and carried a 19% EBITDA margin. Accordingly, if the higher-growth advertising segment continues to scale successfully, divesting the mobile gaming division should markedly enhance shareholder returns.

Founded in 2012, AppLovin has maintained moderate growth in its diluted share count. Basic weighted average shares outstanding declined from 375 million in December 2022 to 340 million in the latest trailing 12 months. This reduction alleviates concerns about share dilution and provides additional justification for bullish sentiment surrounding the stock.

The company operates in a competitive mobile advertising and app monetization space. AppLovin faces competition from Unity Software (NYSE:U), Google (NASDAQ:GOOGL) (GOOG) AdMob, and Meta (NASDAQ:META) Audience Network, as well as emerging players like URXnow part of Pinterest (NYSE:PINS)and Digital Turbine (APPS). Meta and Google have dominant positions likely to be consolidated through large language model supremacy, but this doesnt prevent a targeted and specialized approach from AppLovin from being successful.

Management recently noted that mobile ad spend in the U.S. is projected to reach $228.11 billion in 2025, making up 66.4% of total digital ad spending, while e-commerce app install grew 17% year-over-year in 2024. Despite formidable rivals such as Google and Meta, known for their deeply entrenched technological moats, AppLovin operates within a broad market that offers ample opportunities for growth.

Risks

From an operational perspective, questions have surfaced regarding the quality of AppLovins revenue growth. Short seller The Bear Cave alleges the companys rapid rise is driven by low-quality ads described as deceptive, predatory, and at times unreadable or unclickable. Such claims may subject AppLovin to heightened regulatory scrutiny, and if the allegations hold, severe volatility could follow. This risk is heightened by the companys P/S ratio exceeding 30.

AppLovin also carries substantial debt, with a debt-to-equity ratio of 3.26 and a cash-to-debt ratio of 0.21. Its long-term debt increased from $1.168 billion in December 2019 to $3.509 billion in the most recent trailing 12 months, potentially constraining future cash flows. Debt refinancing may be necessary to preserve the capital needed for strategic acquisitions. Although this approach avoids shareholder dilution in the near term, the rising debt burden may pose operational challenges later on, warranting caution among long-term investors.

The predominant risk lies in the markets speculative outlook on AppLovin stock. While my sentiment analysis indicates that current valuations may remain somewhat sustainable for the next few years, the multiples have become comparatively untenable from a traditional value investing perspective. More details follow in the subsequent valuation discussion.

Valuation and sentiment

AppLovin shares have been in a strong uptrend, supported by a June 2023 golden cross, when the 50-day simple moving average rose above the 200-day moving average. Since late 2024, the stock has consistently traded above its 50-day moving average. Although a recent pullback occurred from an all-time high, the 14-day Relative Strength Index of around 53 suggests limited immediate downside, particularly following robust 2024 results and a positive 2025 outlook. Management projects potentially record quarterly revenue with guidance of $1.355 billion to $1.385 billion for Q1 2025.

Despite overextended valuation multiples by conventional value investing standards, there is little indication they will contract significantly soon. Short-term fair value is, in this case, whatever the market is willing to pay, and a P/E ratio of approximately 70 may remain viable for the next two years. Notably, the companys three-year EPS without NRI growth rate of 270% stems from profitability scaling. As this figure moderates to around 40% in the next few years, the market may still respond positively, given widespread understanding of these dynamics. Revenue growth, meanwhile, is predicted to move from 18% annually over the past three years to about 21% during the next three to five. Assuming a P/E of 70 and an EPS without NRI of $10 by December 2026, the stock could reach roughly $700, a 70% premium over its current price of $415.

By contrast, if the market begins to reassess AppLovins valuation more realistically in anticipation of moderating growth in the years after Fiscal 2026, the P/E ratio could drop much lower, though it is speculative to predict by how much. If for example, the price-to-earnings ratio were to fall to just 41.5, it would produce a share price approximately equal to todays level if the company reports an EPS without NRI of $10 for Fiscal 2026. In other words, current valuations hinge on market sentiment, which underscores the stocks speculative nature.

As a value investor, I remain cautious of an opportunity driven primarily by short-term speculation. I typically invest in businesses at valuations that promise appreciation over many years. Over the long run, I foresee AppLovins P/E ratio moderating sharply, curtailing prospects for significant alpha once the market digests the companys decelerating growth profile.

Counter-analysis

One reason to reconsider a neutral stance on AppLovin is that the average Wall Street 12-month price target exceeds $500, implying a potential 20% return in one year. Furthermore, analysts have substantially revised their fundamental growth estimates upward, likely bolstering near-term sentiment. Nonetheless, caution is warranted, as sentiment can shift rapidly. Given the stocks elevated valuation multiples, it still appears an unwise long-term buy-and-hold investment.

Conclusion

While AppLovin offers an enticing short-term speculative trade, it falls short as a long-term value investment. In adherence to the principles espoused by Warren Buffett (Trades, Portfolio) and Benjamin Grahampurchasing companies at valuations justified by their long-term fundamentalsAppLovin fails to meet the criteria. Although short-term traders may profit over the next two years from sentiment-driven momentum and near-term growth, its valuation appears untenable from a traditional value standpoint.

This article first appeared on GuruFocus.