Why AppLovin Rallied Today

Key Points

• It was announced on Friday that AppLovin would join the S&P 500 index.

• AppLovin rallied double digits, bringing year-to-date gains to over 65%.

• The stock appears to have shrugged off short-seller allegations from earlier this year.

• 10 stocks we like better than AppLovin ›

Shares of AppLovin (NASDAQ: APP) rallied double digits on Monday, up 11.6% on the day.

AppLovin has had a strong recent run, despite a bevy of short-sellers going after the mobile game digital ad company earlier this year. Investors appear to have shrugged off or disbelieved the short thesis on the stock, however, with shares up 68.5% on the year and the company's market cap levitating to a whopping $184 billion.

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The rally has enabled AppLovin to be included in the S&P 500 (SNPINDEX: ^GSPC), which was announced Friday after the close of trading.

AppLovin hits the mainstream

Being included in the S&P 500 is perceived as a big positive for a couple of reasons.

First, it sort of acts as "validation" for the company as part of the top tier of publicly traded companies, thereby gaining increased credibility. Given the short attacks on the stock earlier this year, that's not a small deal.

In addition, stocks within the S&P 500 are subject to greater buying pressure as more and more investors lean toward passive index funds for their equity investments. According to Dimensional Advisors, indexing has jumped from 32% to 58% of invested assets through 2024.

While the S&P 500 isn't the only index, of course, it remains the most popular "standard" way to gain passive exposure to large-cap U.S. equities. It's the basic type of index fund touted by Warren Buffett as the most appropriate for the average investor who doesn't have the time to research stocks in depth.

Image source: Getty Images.

AppLovin is an intriguing but expensive stock

Unsurprisingly, after its strong run, AppLovin trades at a hefty valuation of 51 times this year's earnings estimates.

That being said, the company is displaying hypergrowth as a new artificial intelligence (AI)-powered digital advertising behemoth. Last quarter, revenue was up 77%, with net income from continuing operations up 156%.

Assuming the short accusations don't prove to be credible, AppLovin seems set to become a major digital ad giant, alongside other major search and social media AI beneficiaries.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AppLovin. The Motley Fool has a disclosure policy.