Wall Street vs. Short-Sellers: Is AppLovin a Buy, Sell, or Hold?

The recent short reports against AppLovin (APP) have sparked a heated debate between Wall Street analysts and short-sellers, leaving investors wondering whether to buy, sell, or hold the stock. The company, which operates an advertising platform and develops mobile games, has seen its stock price tumble following the release of these reports. However, management and several analysts have pushed back against the allegations, setting the stage for a battle between the short-sellers and Wall Street.

The short thesis
Three different short reports emerged within a week, alleging various fraudulent and deceptive practices that could get AppLovin's services blocked by Apple, Meta Platforms, and Google. The Bear Cave, Fuzzy Panda Research, and Culper Research all published reports questioning the company's advertising metrics and game monetization practices. These reports have raised concerns about the sustainability of AppLovin's hyper-casual gaming ecosystem and its AI-driven growth narrative.

Management and Wall Street push back
AppLovin CEO Adam Foroughi responded to the allegations in a blog post, stating that the short reports are "littered with inaccuracies and false assertions." He emphasized that the company's games are apps on the App Store and must comply with its policies, and that revenue is not driven by clicks or impressions. Foroughi also denied tracking children's data and refuted claims of financial and accounting improprieties.

Multiple Wall Street analysts have defended the company, with Piper Sandler analyst James Callahan and Jefferies analyst James Heaney both reiterating their buy ratings and price targets. Callahan wrote that AppLovin's customers are the most sophisticated in digital advertising and would immediately detect any fraudulent practices through their own attribution or incrementality testing. Heaney said the short-sellers' claims were "in many cases, inaccurate," and that allegations about illegal clicks and downloads overlook the fact that AppLovin has helped customers produce meaningful revenue.

Buy, sell, or hold?
Unfortunately, this situation is going to be very difficult for retail investors to decipher. The truth likely goes beyond any numbers you'll find in any earnings report or filing with the Securities and Exchange Commission. The shorts appear to have put substantial work into their reports, including anonymous comments from AppLovin customers, industry experts, and even Meta executives. Meanwhile, you've got a CEO who defended the company on the same day that Culper and Fuzzy Panda released their reports, as well as multiple analysts from top Wall Street firms going to bat for AppLovin.

Ultimately, unless they have significant time to do a lot of qualitative research, retail investors are going to be operating largely in the dark. The stock could also be very volatile in the near term on any future news related to this situation. For those reasons, I recommend staying on the sidelines for now, or perhaps taking some chips off the table. The stock has been a multibagger, and the AI trade faces challenges in the near term anyway. Continue to monitor the situation for more clarity.

In conclusion, the recent short reports against AppLovin have raised serious concerns about the company's advertising metrics and game monetization practices. While management and several Wall Street analysts have pushed back against these allegations, the situation remains uncertain for retail investors. It is recommended to stay on the sidelines or take some chips off the table until more clarity emerges.