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Written by Dave Kovaleski for The Motley Fool
AppLovin stock had three straight years of triple-digit returns.
This year, the stock has lost half of its value.
Caution is encouraged before considering the stock a buy amid the downturn.
AppLovin (NASDAQ: APP) made some opportunistic investors a lot of money over the past few years.
The tech company makes software that it sells to companies that produce apps. The software allows the developers to search for advertisers for their apps, serving as a digital auction house. AppLovin gets a fee on every ad sold. Its AI-enabled platform sets it apart from others in the space for its ability to use its algorithms to connect developers to the right ad buyers.
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After dropping to $10 per share at the end of 2022 following an 88% decline that year, AppLovin has posted triple-digit annual returns over the past three years. It returned 280% in 2023, it gained 703% in 2024, and last year, it was up 108%.
Over the past three years, AppLovin stock has posted an average annualized return of 102%. That 102% three-year average return includes a 54% decline year to date in 2026. At the end of 2025, AppLovin shares peaked at $733 per share. It has lost half its value since then, trading at $315 per share as of Sept. 23.
Should investors proceed cautiously, considering the sharp decline, or is this another opportunity that investors should take advantage of? In other words, is AppLovin still a millionaire-maker stock?
AppLovin had been trading at almost 80 times earnings at the end of last year, so the high valuation was certainly a concern. Investors were spooked by overpriced stocks and rotated out into small-caps and more value-oriented names.
There are other concerns. In the most recent quarter, AppLovin missed lofty revenue expectations. Revenue was up 53% to $1.92 billion, while analysts expected $1.95 billion. Earnings surged 57% to $3.76 per share and were in line with estimates.
For the third quarter, AppLovin projects revenue of $2.055 billion to $2.085 billion, which is below the midpoint estimates of $2.8 billion. Adjusted EBITDA projections for Q3 of $1.73 billion were lower than analysts' estimates of $1.75 billion. Its operating margin increased to a ridiculously high 77.7% in the second quarter, up from 76.1% in Q2 of last year.
Is this an overreaction to AppLovin's massive growth that was only slightly below estimates? Perhaps, but there are other concerns as well.
Recently, a securities fraud class action suit was filed against AppLovin for allegedly misrepresenting the "strength, viability, and development of its AI-based business model and products."
In addition, this week, analysts at Edgewater Research issued a note saying AppLovin's revenue growth will slow to 8% to 9% in the fourth quarter year over year. "This is primarily the inevitable result of MAX's [its ad auction software] share reaching a functional ceiling, though our interpretation of feedback also increasingly indicates competition is compressing APP's net revenue spreads, contributing to APP's decel," Edgewater analyst Joe Wittine wrote.
That is a bit worrisome, even though most analysts rate AppLovin stock as a buy with a median price target of $500 per share. That would represent 58% upside.
AppLovin is trading at just 16 times forward earnings, so its valuation is attractive. However, it might be wise to hold off to see Q3 growth rates and the outlook for Q4.
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Dave Kovaleski 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.