AppLovin

AppLovin (APP -13.71%) stock took quite a fall in late-session action on the market Monday. Investors were clearly spooked by a media report that a top regulator was looking into certain business practices of the mobile marketing specialist. That sudden slide saw the company’s shares fall 14% in value, contrasting quite poorly with the 0.4% gain of the S&P 500 index on Monday.

The wrong kind of attention

Near market close Monday, Bloomberg reported that AppLovin has been the subject of a probe by the Securities and Exchange Commission (SEC).

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According to unidentified “people familiar with the matter,” the financial news agency wrote that the probe is in response to a whistleblower complaint filed earlier this year, plus a series of short seller reports on AppLovin disseminated recently.

Specifically, the article stated, the SEC’s effort is focused on AppLovin’s data collection practices. Bloomberg’s sources said that the company hasn’t (yet) been accused of wrongdoing, although it did not seem to be aware of what stage the regulator’s probe might be in.

Mum’s the word for now

The SEC declined to comment on the matter, citing an inability to respond to press queries due to the federal government shutdown. AppLovin also effectively refused, stating that “we regularly engage with regulators and if we get inquiries we address them in the ordinary course.”

Although at this point any investigation must be considered speculative, this is unquestionably a development worth watching for AppLovin investors and observers. Given that, it wouldn’t be wise to invest in the company on that share-price swoon.

Shares of AppLovin (APP -3.57%) rose 50.1% in September, according to data from S&P Global Market Intelligence. The climb reflected growing optimism ahead of the company’s Oct. 1 product event, which unveiled a self-serve ads platform aimed at e-commerce and other non-gaming advertisers (the company already has a strong foothold in gaming).

Leading up to the event, a string of bullish analyst actions late in the month bolstered investor sentiment for shares of the advertising technology company. In addition to boosting their price targets for the stock, the analysts expressed optimism for the upcoming expansion of its platform.

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Expanding its addressable market

Late last month, Wall Street leaned in. Multiple analysts raised price targets and highlighted AppLovin as a top idea, citing strong demand for the company’s next wave of AI-powered ad tools and a broader push beyond gaming advertisers. The anticipation centered on “Axon Ads Manager,” a self-serve portal designed to reduce manual onboarding and open the platform to more e-commerce brands.

That anticipation culminated on Oct. 1, when AppLovin began rolling out Axon Ads Manager on a referral or invitation basis — a timely move aimed at capturing holiday-season budgets and making it easier for non-gaming marketers to buy on the platform. The company also emphasized Axon as the artificial intelligence (AI) engine powering its ad matching.

The setup followed solid summer fundamentals. In early August, AppLovin reported 77% year-over-year top-line growth in the second quarter. In addition, its net income margin expanded from 44% in the year-ago period to 65%, helping its bottom line soar 164% year over year to a substantial $820 million for the quarter.

Looking ahead

After September’s rally, AppLovin now trades at an extremely high valuation. Shares trade at a price-to-earnings multiple of 88 as of this writing. Clearly, there are high expectations for Axon’s adoption, e-commerce penetration, and continued margin expansion for the overall company.

From here, investors should watch three things. First, the Axon Ads Manager rollout pace — particularly how quickly referral-only access broadens and how many non-gaming advertisers start spending meaningfully. Second, investors should focus on fundamentals, looking for sustained revenue and free cash flow growth at high rates throughout the holiday quarter and beyond. Finally, keep an eye out for competitive response across ad tech — especially as rivals court the same e-commerce budgets with their own AI-assisted tools. If the uptake of the new Axon Ads Manager is slower than expected, or the macroeconomic environment prompts markets to tighten ad budgets, shares could underperform; the valuation multiple leaves little room for disappointment.

According to data compiled by S&P Global Market Intelligence., AppLovin‘s (APP 1.87%) stock was among the market’s most-loved this week, rising by nearly 19% in price over the period. That was entirely understandable, as the shares were tapped for an inclusion on one of the top stock indexes in the world, and capped the week by being the subject of an analyst price target raise.

Index inclusion

Just after market close last Friday, index compiler S&P Dow Jones Indices, a division of S&P Global, announced that AppLovin would be a component stock of its bellwether S&P 500 (^GSPC -0.05%). This was among a series of adjustments made by S&P Dow Jones Indices as part of its quarterly “rebalancing” to reflect changes in market cap for certain stocks.

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AppLovin is being accompanied by next-generation brokerage Robinhood Markets and mechanical/electrical systems specialist EMCOR Group in the current round of S&P 500 advancement. The three stocks are displacing current components MarketAxess Holdings, Caesars Entertainment, and Enphase Energy.

These changes will take effect before market open on Monday, Sept. 22.

Double-digit potential

Friday morning, Wedbush analyst Alicia Reese added to the generally positive sentiment on AppLovin by raising her price target on the stock. That hike was substantial, as the pundit cranked it 17% higher to $725 per share, well up from the previous $620. At AppLovin’s most recent closing price, the new level anticipates upside of nearly 25%.

According to reports, Reese’s move was based on what she considers to be strong and sustainable growth in several of the company’s customer segments, including gaming and e-commerce.