AppLovin Is the Worst-Performing Stock in the S&P 500 This Year. Has the Market Overreacted?

Shares of AppLovin (NASDAQ:APP) are down 65% so far in 2026, making it the worst performer in the S&P 500 as of the end of October. It's been an abysmal performance for the tech stock. And rather than one big sell-off, it's been a continually slow, painful decline for the company's shareholders.

The adtech company's business model has been in question, as fears that artificial intelligence (AI) will disrupt its operations and impact its growth potential have sent it into a tailspin. But has the market overreacted to these risks, and could AppLovin be worth buying right now, or is the tech stock really doomed to go even lower?

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AppLovin's growth remains strong, and its margins are high

Although there is the looming concern that AI could disrupt AppLovin's growth prospects, the business itself isn't reflecting that. Through the first six months of the year, the company's revenue rose by 56% year over year, totaling $3.8 billion. And of that total, $2.5 billion went straight to earnings, for an impressive profit margin of 66%.

AppLovin has an efficient, highly profitable operation. And for the current quarter, the company is forecasting around $2.1 billion in revenue, with an adjusted margin of 83%. A year ago, the company's top line was $1.4 billion for the period, which translates into a projected year-over-year growth rate of about 50%.

This doesn't strike me as a business that's in deep trouble, to the point that a significant sell-off is warranted. However, what may have played a big role in its decline was its inflated valuation in the past, which may simply not have been justified.

The stock could make for a good contrarian buy

AppLovin's stock is down sharply this year, but if not for its high valuation, the sell-off likely wouldn't have been as extreme as it has been. Now with the stock trading at just 18 times its trailing earnings, it makes for a much more tenable investment. It's an undervalued stock given that the average S&P 500 stock trades at a price-to-earnings multiple of around 24.

I do believe there's been some degree of market overreaction with AppLovin, as there has been with other software stocks. There's also been a correction to its valuation because it was so high at the beginning of the year. Now that it's more reasonably priced, it may be worth buying at these levels.

There is some risk with the stock, but perhaps not as much as what the market may be pricing in right now. For investors who are willing to take on some uncertainty and volatility, the stock may be worth buying.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.