AppLovin Shares Crash Despite Stellar Growth. Is It Time to Buy the Stock on the Dip?

Despite posting strong fourth-quarter growth and issuing upbeat guidance, shares of AppLovin (NASDAQ: APP) were crashing after the company reported its results. The stock has now lost more than 40% of its value this year, as of this writing. Let's take a closer look at the company's results and prospects to see if this dip is a good buying opportunity.

Strong growth and guidance

AppLovin's stellar growth in recent years has been powered by its artificial intelligence (AI) adtech platform Axon 2.0, and that continued in the fourth quarter. The company's revenue climbed 66% to $1.66 billion.

The company also continues to boost its gross margin while reducing its operating costs. In Q4, its gross margin improved to 88.9% from 84.7% a year ago, while it lowered its operating costs by 9%, including reducing its sales and marketing expenses by 21%.

Earnings per share (EPS) from continuing operations surged 87% from $1.73 a year ago to $3.24, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soared 82% year over year to $1.4 billion.

The company is also generating a boatload of cash. In the quarter, it generated free cash flow of $1.3 billion and $3.95 billion for the full year. It ended the year with $1 billion in net debt, down from $2.8 billion to start the year, helped by its free cash flow and the sale of its app business. The company also repurchased 800,000 shares in the quarter and 6.4 million for the year.

Looking ahead, AppLovin projected Q1 revenue to be between $1.745 billion and $1.775 billion, representing growth of between 50% and 53%. It forecast adjusted EBITDA to be between $1.465 billion and $1.495 billion.

Image source: Getty Images.

Should investors buy the dip in the stock?

AppLovin once again turned in a strong quarter, with soaring revenue and gross margin expansion. Meanwhile, it's rare to see a company growing so quickly while also reducing its operating costs.

The company's growth continued to largely be driven by its mobile gaming ad business, but it is looking to launch its self-service e-commerce platform for general availability later this year. AppLovin has also started to pilot AI tools to help automate some of the creative process to help customers more cheaply create new video ads in bulk. These are all potential growth opportunities.

However, there have been some worries about increased competition in the gaming ad space, particularly from Meta Platforms, which analysts kept pounding AppLovin management with questions about throughout its earnings call. Meta used to hold about a 50% market share in the gaming ad space, but AppLovin management pointed out that the market is much different today and that Axon 2's closed-loop model keeps making it better and smarter, giving it an advantage.

Following the sell-off, the stock trades at a forward price-to-earnings (P/E) ratio of under 26.5 based on 2026 analyst estimates. For the growth AppLovin is seeing, that's cheap. That said, given the current market environment, I would only be cautiously looking to add a small position.

Geoffrey Seiler has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.