APP Stock: Sales Up 55%, Stock Down 60%. What Broke?

APP stock: sales up 55%, stock down 60%

0:00 AppLovin stock, ticker APP, closed at about $272 on November 4, then jumped about 21% after hours on sales up 55% and a guide well above Wall Street. And here's the strange part, the business never shrank. Sales kept growing all year, yet the stock got crushed. So what actually broke here? So if you're bullish, this was the worst stock in the S&P 500 this year, and it's still well under the average analyst target of about $448. But if you're skeptical, stick around, because 1 great night doesn't erase a 60% drop, and there's 1 number in this report I'd watch more than any other.

0:34 [Chad] +21%! We're so back! [Trad Wife] Babe. It fell 60%. [Wojak] Cool. I bought at $738.

Intro

0:43 My name is Blake. I dig up stocks before the bull stampede, so you're not buying the top like Wojak. And today on 9to5investing, we're talking about APP stock, and whether this jump in price is actually the beginning of a new start or just the best night of a terrible year. Picture a guy at a flea market who owns no merchandise, but he knows which shopper wants which item, so he takes a cut of every sale.

How AppLovin's Axon ad engine makes money

1:07 Now imagine that flea market guy gets better at matching shoppers with sellers every single month, and he can handle a lot more business without his costs rising nearly as fast. So what does the flea market guy actually do? AppLovin runs an advertising engine called Axon, and it decides which ad shows up in front of which person inside mobile apps, especially mobile games. So when you're playing some game on your phone and an ad pops up for another game, there's a decent chance a system like this picked that ad, for you, in a split second, because it predicted you might actually tap it.

1:34 And advertisers pay for that because it works, which is really the whole business. There's no factory, no warehouse and no fleet of trucks, so when the software gets better at matching, most of the extra money just falls to the bottom. Then the company took that same engine beyond games, to regular consumer brands selling stuff online, and the potential market got a whole lot bigger, which is when Wall Street started treating it like a big AI story.

1:54 Because back in June, CEO Adam Foroughi said ad revenue was in the hundreds of millions of dollars in 2022, and analysts now see around $8 billion of revenue this year, and that's the kind of chart that gets a stock in front of everybody.

Why APP stock fell 60% in 2026

2:06 So the stock ran. At 1 point in the past year it hit about $738, and Chad told everyone at the gym it was the next great AI stock. But then 2026 happened, and heading into this report the stock was down about 60% for the year, which made it the worst performer in the entire S&P 500. And that's where Wojak comes in. If he bought near the high, the stock fell from about $738 to about $228 by the end of October, so roughly 69% of his money was gone while the company kept reporting huge numbers.

2:35 Very confusing for our friend Wojak. So what actually broke? Well, 2 things broke. The 1st is that on the 2nd-quarter call, Foroughi acknowledged that model improvement was lighter than normal, and for a company whose whole pitch is that the machine keeps getting smarter, that's the 1 sentence you don't want to say. It's like the flea market guy admitting his instincts aren't improving as fast as they used to. The sales are still good, but everybody suddenly asks how long that lasts.

2:59 So the stock fell about 20% in the next trading session, but the target cuts kept coming. Between October 12 and October 28, 7 different firms lowered their targets. The 2nd thing that broke is what people would pay for it. According to TIKR, almost the whole drop came from the multiple shrinking, not the earnings, and the multiple is just how many dollars people will pay for every $1 of expected profit. The day before this report, people were paying under 13 times expected earnings, compared with a 5-year average of about 25 times.

3:24 So the profits stayed, but the price tag on those profits got cut in half. That's a very different kind of crash. Nobody said the store was empty, they just stopped believing in next year's store. And Doomer loved it, because the Trade Desk, another ad tech company that got dropped from the S&P 500 in September, is down about 65% this year after 2 straight earnings misses, so the whole group started to look like it had seen its best days. By the way, I will admit I am a bag holder on the Trade Desk.

3:49 Here's the receipts. So that was the setup going into November 4, and the bar was simple. Show the machine still works.

Q3 2026 results: revenue, margin, buybacks

3:55 Here's what came out. Revenue was about $2.2 billion, up 55% from a year ago, and Wall Street was expecting about $2.07 billion. The company's own guide topped out at about $2.09 billion, so it cleared the top of its own range by about $100 million. Net income was about $1.4 billion, up 72%, on about $2.2 billion of sales, so roughly 66 cents of every dollar made it all the way to the bottom line. I'll put my CPA hat on for a second, because I spent years looking at income statements, and that's a number you almost never see.

4:23 Most great businesses would frame that margin and hang it in the lobby. [Boss] Sixty-six percent net margin. Frame it. [Wojak] And next year? And the Motley Fool pointed out that about 81% of the new revenue this quarter turned into operating income, even with research spending more than doubling. Said another way, for every extra $1 the flea market guy brought in compared with last year, about 81 cents became operating profit, which is just profit before interest and taxes.

4:47 That's why people fell in love with this business in the 1st place. Free cash flow, which basically just means the cash left over after running the business and paying for equipment and certain lease payments, came in at about $1.4 billion in a single quarter. And here's what it did with that cash. It spent about $1.4 billion buying back and withholding its own stock, so nearly every dollar it generated went right back into shrinking the share count.

5:09 Now let's do something fun with that number. $1.4 billion for 4.1 million shares works out to about $340 a share, and that's my rough math, because that count includes shares withheld for employee taxes. So think about what that means. Even after jumping to about $330 after hours, the stock was still below that rough cost, and remember, that cost includes shares withheld for employee taxes. That's either a great sign, or a company that bought too early, and honestly it depends on what happens next.

5:32 Which brings us to the real reason this stock moved. So the revenue beat matters, but the guide also changed what investors could expect next. A beat is nice, but this stock has beaten before and still fallen.

The Q4 guide vs Wall Street

5:43 Here's the number I promised you, and it's the guide for the next 3 months. AppLovin expects about $2.38 billion of revenue next quarter at the midpoint, and the FactSet consensus was about $2.25 billion. That works out to about 44% growth from a year ago, and the consensus had been implying roughly 36%. So that's the whole story in 1 line. Remember, the fear wasn't about last quarter. The fear was that the machine was slowing down, and management now expects next quarter's sales to come in well above what Wall Street had penciled in.

6:09 And if revenue came in another $100 million above that new midpoint, growth would be about 50%. That's my scenario, not management's forecast or a promise.

Analyst price targets and valuation

6:17 So let's get to the analysts, because that's probably a lot of the reason why you clicked on this video. Before this report, the average price target was about $448. From around $328, that's roughly 37% higher, and RBC's $500 would be about 52% higher. But look at how wide that pile is, because a target is just 1 person's estimate. Wells Fargo was at $325 with an Equal Weight rating, Goldman was at $400 with a Neutral, and the high end of the S&P Global survey was about $625.

6:43 Every one of those numbers was set before this report, so a lot of them will probably change by the time you see this, and I'd expect some of them to go up. [Newsboy] Extra, extra! Earnings out! So how does $448 compare with earnings? Analysts were expecting about $20 of adjusted earnings per share in 2027, which basically just means earnings with certain costs left out, so that target is roughly 22 times the estimate. At about $330, you're paying roughly 16.5 times that same adjusted estimate.

7:12 A higher multiple could lift the price, but the earnings estimate could change too. That's the actual bet here. And if investors went back to paying 25 times, that same math lands around $500, but that old average used a different earnings period. Now that's one scenario, and I would not treat it as a forecast.

The risks: slowdown, taxes, lawsuit, disclosure

7:27 Now before Chad screenshots that and calls his broker, let me give you the other side, because there are real reasons this stock got cheap. The 1st one is that 44% is still slower than 55%. So even in the good version of this story, the guide shows growth cooling off, and growth stocks usually get punished when that happens. Think about it. Sales grew 55%, and management's new guide implies about 44%, which still cleared Wall Street's bar. So nobody should expect 55% forever.

7:54 Back in June, the CFO said consumer growth could offset slower gaming growth and support 20% to 30% growth over an extended period. The 2nd one is taxes, and this is the one I'd watch as a CPA. In the 1st half of this year, AppLovin paid about $640 million in cash taxes, compared with about $100 million a year earlier. So the flea market guy finally got a visit from the tax man, and management now expects full-year free cash flow at roughly 70% to 75% of adjusted EBITDA, which basically just means profit before interest, taxes and some non-cash costs, compared with about 88% last year.

8:24 And you can see it in this quarter. Net income grew 72%, but free cash flow grew only about 35%, so the profit is growing about 2 times as fast as the cash. Now that's not a scandal, because part of that gap is simply a company paying more taxes on more profit. But the same earnings now turn into less cash, and cash is what pays for those buybacks. The 3rd one is the lawsuit. A proposed class action filed in September claims the company overstated how consistent its model improvements were and how fast a generative video tool would arrive.

8:50 The complaint makes allegations, and it isn't a court finding of wrongdoing. But it's the same worry that crashed the stock, now with lawyers attached. And the 4th risk is disclosure. On the call, management said consumer-advertiser spending grew at least 10% from the prior quarter and at least 100% from a year earlier, but it didn't give separate consumer revenue. So when Chad says it's taking over all of online advertising, I can't check that from these numbers, and neither can he.

9:13 As a former auditor, that's the kind of thing that would make my eye twitch. [FOMO Trader] Consumer revenue... trust us? Advertisers can test whether their campaigns actually bring in extra sales, but investors like you and me can't look inside Axon, so 1 weak guide could still undo a lot of this optimism. So why did this stock jump after that report? Because the guide still shows a slowdown, just a much smaller one than Wall Street expected, and that's what helps explain the reaction.

What I'd watch next

9:43 So what would I do? For the record, I don't own APP. But if I were watching it, I'd check 2 things. Number 1 is the next guide, because the market just decided to believe again, and I'd watch whether the company keeps clearing the bar as it gets bigger. Number 2 is the gap between profit and cash, because if free cash flow keeps growing at half the speed of earnings, that low multiple isn't as cheap as it looks. And the bigger lesson works on any stock.

10:07 When profits keep climbing and the stock keeps falling, the argument usually isn't about the business, it's about what investors expect next and how much they're willing to pay for it. So would you buy this after a jump like that, or wait for the stock to come back down? Tell me in the comments. The flea market guy found the right buyer for every ad, and YouTube says this next video is for you. [Dan] I've got a match for you.