AppLovin Stock Declines 12% Amid Legal Woes and Overvaluation Concerns, Short-Term Bearish Outlook

Technical Analysis

AppLovin Corporation (NASDAQ: APP) closed at $331 on February 26, 2025, experiencing a significant decline of 12.22% with a trading volume of 31.62 million, far exceeding its average volume of 5.64 million. The Relative Strength Index (RSI) stands at 45, indicating the stock is neither overbought nor oversold, but leaning towards the latter after the recent drop. The MACD over three months remains positive at 33.32, suggesting upward momentum in the medium-term, yet this momentum might be waning given the recent sell-off. The stock sits below its 50-day moving average of $364.17, indicating a short-term bearish trend, although it remains well above its 200-day moving average at $192.47, showing strength in the longer-term trend. The ATR of 11.61 reflects substantial volatility, corroborated by the day's price range from $288.92 to $343.17. Support is identified at $330, with resistance at $342.54.

Fundamental Analysis

From a fundamental perspective, AppLovin's high P/E ratio of 73.23 implies that the stock is priced for considerable earnings growth. The EPS (TTM) is $4.52, highlighting profitability but possibly already priced into current valuations. The market capitalization stands at $112.55 billion. However, the stock's current price of $331 significantly overshadows the discounted cash flow model's intrinsic value estimation of $88.26, suggesting overvaluation. Analysts' target prices present a wide range, with a high of $538 and a low of $108, but the consensus target is $252.75, which is notably below the current trading price. Out of the analysts covering the stock, 19 have positioned it as a 'buy,' and 5 as a 'hold,' with no 'sell' or 'strong sell' ratings, indicating overall positive sentiment toward the stock.

Recent Events and Short-term Outlook

Recent announcements reveal investigations into potential securities fraud, adding negative pressure. Both Culper Research and Fuzzy Panda Research have released short reports, likely triggering some of the recent price declines. Legal investigations by multiple law firms, concerning possible violations of federal securities laws, create additional uncertainty and potential risks, impacting short-term investor sentiment negatively.

For the next trading day on February 27, 2025, further volatility can be anticipated, with the likelihood of continued downward pressure given the news. Support at $330 could be tested, and should that fail, a further downside to the $288 range could be in sight. Over the upcoming week, the stock might witness heightened volatility driven by ongoing investigations and broader market sentiment.

Intrinsic Value and Long-term Potential

The discrepancy between the DCF valuation of $88.26 and the current price of $331 suggests AppLovin is significantly overvalued on a fundamental basis. However, the stock's price remains buoyed by growth expectations reflected in its high P/E ratio. The strong long-term chart support above its 200-day average hints at underlying investor confidence in its business prospects. Yet, the ongoing legal investigations represent a material risk, potentially overshadowing long-term growth ambitions and eroding shareholder value if negative outcomes occur.

Overall Evaluation

Taking into account the technical and fundamental analyses, short-term legal risks, and overvaluation in relation to intrinsic value, AppLovin Corporation can be categorized as a 'Hold'. Although medium-to-long-term growth prospects appear attractive, the stock's current trading level does not present a compelling valuation, especially amidst legal uncertainties. Investors might prefer observing the unfolding legal outcomes and market reactions before reassessing their positions.