Should Investors Buy AppLovin Stock After It Dropped by More Than 40%

AppLovin (NASDAQ: APP) operates an advertising platform that connects businesses that want to display ads on mobile apps with app companies selling ad space. It became a hot name in the adtech industry a few years ago, and its shares surged from just under $10 at the start of 2023 to more than $700 at the end of 2025.

Investors who missed out on that rally have been given a second chance. A broader correction among software-as-a-service (SaaS) stocks has resulted in AppLovin shares dropping by almost 50% from their 2025 highs. They are still off by more than 40%. A short report from CapitalWatch also hurt the stock at the start of 2026, but, under legal pressure, the short-seller retracted some of its allegations in late February, saying that they were "inaccurate."

Although any big dip will frighten investors, this one looks like a buying opportunity, particularly if AppLovin can maintain its growth rates.

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AppLovin delivers growth with net profit margins above 60%

AppLovin is one of the few growth stocks that can deliver strong top-line growth while boasting net profit margins above 60%. That's not a one-year blip, either. AppLovin's net profit margins first soared in 2024, going from 19.4% in 2023 to 49% in 2024. Then, AppLovin delivered a 62.6% net profit margin in 2025.

Revenue growth didn't slouch over this stretch; in Q4 2025, sales were up 66% year over year. AppLovin also has a pristine balance sheet. It has an attractive 3.32 current ratio, showing it has plenty of money to cover its near-term liabilities.

That strong balance sheet means AppLovin's growth is sustainable.

Fears of AI are overblown

While artificial intelligence (AI) has helped some business optimize their services and generate more revenue -- just ask AppLovin -- the fears that this technology will replace an array of software offerings are overblown. This fear is the major reason AppLovin is down from all-time highs. Anthropic released Claude Cowork in January, and its agentic AI plugins made it easy for people to have Claude perform many tasks that have up until now been best handled using subscription software titles.

Concerns that AI will crush the business models of SaaS companies -- the SaaSpocalypse -- are why the benchmark S&P Software and Services Select Industry index is down by around 23% year to date. Yet strong overreactions on Wall Street are nothing new. It wasn't long ago when ChatGPT was being dubbed a "Google killer," but Alphabet is adapting to AI quite well.

It's similar to how CVS Health (NYSE: CVS) saw its value drop almost a decade ago when Amazon (NASDAQ: AMZN) said it was entering the pharmaceutical industry. Amazon's pharmaceutical segment has become successful, but it didn't destroy CVS' business. Along the way, all of the pessimism gave investors good opportunities to buy CVS stock at a discount.

The same scenario may be playing out for AppLovin. While Anthropic's AI agents may be versatile tools, the recent sharp pullback in software stocks appears to be an overreaction.

One strong earnings report may be all AppLovin needs to shift the narrative and reward new investors. Its guidance calls for $1.76 billion in revenue at the midpoint in the first quarter, which would amount to more than 50% year-over-year growth. It will deliver its Q1 numbers on May 6.

AppLovin currently trades at a P/E ratio of 39, a valuation that looks attractive given its growth opportunities and rising margins. It's a little higher than the P/E ratio of the S&P Software and Services Select Industry index, but most of the companies in that sector index aren't growing as quickly as AppLovin.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Amazon. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.