2 Reasons Why AppLovin Has a Lot to Prove on May 7

Whenever a stock story is told, the timeframe of that story can make a big difference. For example, AppLovin (NASDAQ: APP) stock is down more than 40% from highs in 2025, which paints a negative picture. But it's also up more than 600% in just the last three years, which is stellar. That said, what happens from here could have a lot to do with what happens on May 7.

On May 7, AppLovin is scheduled to report financial results for the first quarter of 2025. Under ordinary circumstances, investors would do well to not overemphasize a single quarter of financial results. But for this advertising technology (adtech) company, these are not ordinary circumstances.

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These aren't ordinary circumstances for AppLovin for two reasons. First, the stock has an expensive valuation of 20 times sales, valuing the company at nearly $100 billion. In other words, investors' expectations are absolutely sky-high.

Second, AppLovin's entire business has been called into question by various short sellers in recent months -- investors who will make money if the stock goes down. This injects a fair bit of fear and doubt into the investor community.

The combination of a high valuation and an elevated sense of fear creates a potentially volatile situation. When it reports Q1 results, AppLovin has an opportunity to prove itself to investors or it may confirm fears that were stoked by the short sellers. Therefore, I believe it's fair for investors to expect a big move on May 7, one way or the other.

How AppLovin makes money

In 2024, roughly two-thirds of AppLovin's revenue came from the advertising side of its business. This part of the business generated more than $3 billion in full-year revenue last year and it's grown at a nearly 100% compound annual growth rate since the end of 2020. That's not a typo -- growth has been extraordinary.

The extraordinary growth is why AppLovin stock has a pricey valuation -- investors believe it deserves to be highly valued. But the growth rate is precisely why the business has become a target. Short sellers question the authenticity and the sustainability of the growth.

AppLovin's software displays in-app advertisements intended to monetize the app displaying the ad and also intended to help new apps get discovered. But short sellers allege that not all clicks on its ads are genuine. Moreover, the allegations also question whether AppLovin is violating policies for mobile operating systems, which risks its software getting banned.

AppLovin's management has already taken time to address these allegations. And herein lies an important part of the business model: According to the company, it doesn't generate advertising revenue merely when someone views an ad -- that's called an ad impression and it's how many advertising businesses work. By contrast, AppLovin generates revenue when its customers achieve a desired return on their advertising spend.

In other words, the business model is constructed to benefit AppLovin only when its customers succeed. That could very well account for its eye-popping growth rate and could sustain growth in coming years. Q1 results on May 7 could help confirm this for investors.

Where to expect growth for AppLovin

In-app advertisements for mobile video games have driven and are still driving financial results for AppLovin. But investors are looking forward to hearing more about two other growth avenues.

First, AppLovin has started serving e-commerce customers in addition to mobile gaming companies, which is a much bigger opportunity. And according to management, it's catching on fast. In a late February update, management said advertisers were already spending at an annualized rate of $1 billion (gross) for e-commerce, even though the initiative was only getting started.

Second, AppLovin is looking at connected-TV (CTV) channels in addition to just mobile operating systems. Considering a lot of advertising spend is expected to shift to CTV in coming years, this could provide the company with yet another tailwind.

I've rarely seen a company grow as AppLovin has. Its rapid rise from obscurity understandably has some investors putting it under a microscope and that's fair. Hopefully AppLovin will be able to lay concerns to rest when it reports Q1 results. And if the business continues to hum while management expands into new growth opportunities, this stock could see more gains this year and beyond.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AppLovin. The Motley Fool has a disclosure policy.