Shares of AppLovin (APP +2.03%) fell 22% this week as of Friday at 3:10 p.m. ET, according to data from S&P Global Market Intelligence.
AppLovin was the best-performing technology stock in 2024, up 714%, and also started 2025 off well on the back of a very strong Q4 earnings report. However, this week, two different short-seller hedge funds published pieces on AppLovin, accusing the company of misleading customers and investors alike.
NASDAQ: APP
Key Data Points
Fuzzy Panda, Culper Research attack
On Wednesday, short-seller firms Fuzzy Panda and Culper Research published jointly researched short cases against AppLovin. At the core of their arguments was that AppLovin's Axon 2.0 digital ad platform, which serves advertisements in free-to-play mobile games, is using dubious tactics to artificially inflate its ad sales.
The accusations include both reverse-engineering, or quasi-stealing, ad data from Meta Platforms, which has been the undisputed leader in artificial intelligence (AI)-powered digital advertising. In addition, the short-sellers accused AppLovin of making deals with leading mobile handset and network companies to directly download the company's ad software without user approval, in violation of leading ad store policies.
The short-sellers then called on not only government watchdogs, but also Meta and other big tech companies with app stores to step in and shut down the allegedly shady practices.
AppLovin CEO Adam Foroughi responded in a blog post:
It's disappointing that a few nefarious short-sellers are making false and misleading claims aimed at undermining our success, and driving down our stock price for their own financial gain, rather than acknowledging the sophisticated AI models our team has built to enhance advertising for our partners.
Foroughi then went on to deny the specific allegations that AppLovin doesn't comply with app store policies, or that it "steals" data outside its own ad tech ecosystem.
What should investors do?
AppLovin investors should obviously monitor the situation and any revelations that may come out. However, short-sellers often go after stocks that have rallied a lot in a short amount of time. Often, these companies' valuations are high, and if short-sellers can make a decent case, investors may be left with the impression that recent positive financial results may be the result of trickery and not merely good business execution.
This is why it's very important, as Peter Lynch once said, to "know what you own." If investors take the time to know a lot about AppLovin's technology and the background of its management team, that would inform investors whether they should believe the short-sellers' accusations or not.
For those unfamiliar with AppLovin, this may be a good time to dig into the company. If the allegations prove false, the short-seller report may offer an opportunity to buy into what has been a very high-performing name.
