What's Wrong With AppLovin Stock?

It wasn't all that long ago that AppLovin (NASDAQ: APP) was a top growth stock to own. Last year, for instance, the stock more than doubled in value. The year before that, it was up over 700%. It was a growth beast that looked unstoppable.

The party has seemingly come to a drastic, abrupt end this year, as it has given back a significant chunk of its gains and its valuation has been more than halved. It's now trading around the levels it reached in late 2024.

What's gone wrong for the stock, and can AppLovin recover, or is this a tech stock investors are better off avoiding right now?

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What's behind AppLovin's decline?

AppLovin's stock nosedived after reporting earnings recently, and many investors may be tempted to cite that as a reason for some of its troubles; growth may not be as promising as it once was. But to truly see the big picture, investors will see that the decline has been taking place since the start of the year, at a time when many software stocks were falling sharply.

The cause may simply be broader concerns about artificial intelligence (AI) disrupting its business model. Even a top software stock such as Microsoft hasn't been immune to adversity this year. The difference, however, is that while it has recovered, AppLovin hasn't. Its recent earnings, along with its high valuation at the start of the year, may have also weighed on the stock's performance over the past several months.

The company reported earnings earlier this month, with revenue of $1.92 billion for the most recent period falling short of Wall Street estimates of $1.94 billion. While it wasn't a huge miss, at a time when software and adtech stocks have been vulnerable, it was enough to send AppLovin shares lower.

Can AppLovin's stock bounce back?

Microsoft turned things around after posting a strong earnings report recently, and AppLovin may need to do the same. The good news is that with it trading at 24 times earnings, its valuation is much more modest than it was at the start of the year, when its price-to-earnings multiple was around 80.

AppLovin may be a compelling contrarian stock to buy on weakness right now as there may be some market overreaction priced into its value, but it's by no means a sure thing at this point. Investors who buy the stock will need to brace for volatility and be willing to take on some risk.

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