AppLovin Beats Earnings, but the SEC Investigation Is the Real Story Investors Should Be Watching
News Summary
AppLovin reported strong third-quarter earnings on November 5, with revenue surging 68% year over year to $1.41 billion and adjusted EBITDA jumping 90% to $1.16 billion, both exceeding analysts' expectations. These growth rates exclude its mobile gaming business, which was sold in July. The company's fourth-quarter outlook also surpassed estimates, projecting a 12% to 14% sequential increase in revenue and adjusted EBITDA. However, despite the robust financial performance, post-earnings stock gains were capped by an ongoing Securities and Exchange Commission (SEC) probe into its data collection practices. The SEC investigation stems from allegations by short-sellers that AppLovin's AI-driven Axon platform improperly pulled user IDs from other apps like Google, Meta, Snap, TikTok, and Reddit for targeted advertising. AppLovin denies these claims but acknowledged in its latest 10-Q filing that if successful, such claims could adversely affect its business, financial condition, and results of operations; even defense costs could throttle growth. While analysts still expect AppLovin's revenue and adjusted EBITDA to grow at a CAGR of 27% and 42% respectively from 2024 to 2027, primarily driven by Axon, the SEC probe casts a dark cloud over Axon's future and could lead to valuation declines. Insider selling also indicates that the stock may remain under pressure for the foreseeable future.
Background
AppLovin initially operated as a mobile game publisher but significantly expanded its digital advertising business in 2022 through the acquisitions of mobile adtech company MoPub and connected TV advertising company Wurl. In 2023, the company launched its artificial intelligence (AI)-powered Axon ad discovery platform. This strategic pivot to AI-driven adtech, expanding its advertising ecosystem into non-gaming markets such as e-commerce marketplaces and connected TV services, became its core growth engine. Last year (2024), AppLovin sold its entire mobile gaming business for $400 million in cash to further focus on its advertising segment. Earlier this year (2025), AppLovin placed a bid to buy TikTok's international business from ByteDance, a move that could be complicated by its ongoing SEC probe and competition from larger potential suitors like Amazon, Microsoft, and Oracle. The SEC investigation came to light after Bloomberg reported on the probe in early October, following prior allegations from short-sellers regarding AppLovin's data collection methods.
In-Depth AI Insights
What is the true strategic implication of AppLovin's aggressive pivot to AI-powered adtech amidst regulatory scrutiny? - AppLovin's rapid expansion into AI-driven adtech, while delivering strong financial results, highlights the high-stakes gamble many tech firms are taking on data monetization. This model heavily relies on the large-scale collection and utilization of user data, inherently carrying significant legal and reputational risks in the current environment of increasing global data privacy regulations. - The investment in AI-driven advertising, particularly the Axon platform, is AppLovin's key attempt to establish a differentiated competitive advantage in the fiercely contested digital advertising market. However, if its core data collection methods are deemed illegal, this advantage would vanish, potentially leading to fundamental business model adjustments or substantial fines. How might the SEC investigation reshape data practices and the compliance landscape within the digital advertising industry? - The SEC's investigation into AppLovin, regardless of its outcome, could prove to be a watershed moment for the digital advertising industry. It will send a clear signal to all companies heavily relying on user data for targeted advertising that data collection and usage must strictly adhere to existing and future privacy regulations. - Given President Trump's administration's continued focus on data privacy and the power of tech giants, the SEC may be looking to send a strong message against data misuse through this case. This could prompt the industry to accelerate the adoption of more privacy-centric advertising technologies (e.g., zero-knowledge proofs, federated learning) or push for stricter industry self-regulation to avoid similar future regulatory crackdowns. - In the long term, this investigation could accelerate the shift of the digital advertising ecosystem towards first-party data and contextual advertising models, diminishing reliance on third-party data and complex user profiling. This could be an opportunity for companies with extensive first-party data or those focused on content distribution, while posing a threat to third-party data aggregators. How should investors adjust their valuation models when assessing AI adtech companies similar to AppLovin? - Investors need to incorporate regulatory risk as a core, quantifiable factor in their valuation models, rather than just a qualitative risk. This means considering the probability and magnitude of future revenue and profit declines in discounted cash flow models due due to potential fines, legal costs, business model alterations, or data acquisition restrictions. - For companies heavily reliant on specific data collection or AI algorithms to generate competitive advantages, their valuation premiums should be scrutinized. If the legality of these core technologies or data sources is in question, their moats become fragile or could even 'disappear.' - Furthermore, close attention should be paid to insider trading activity, as this often reflects the true sentiment of company leadership regarding future prospects. The insider selling at AppLovin following the investigation's disclosure is a cautionary signal, suggesting they may anticipate continued stock pressure.