AppLovin Reports Strong Earnings. The Stock Is Up.

AppLovin shares are up 92% this year. (Dreamstime)

AppLovin reported strong third-quarter earnings results Wednesday afternoon. Its shares were up 6.8% in after-hours trading.

Earnings per share were $2.45, above Wall Street’s consensus estimate of $2.38, and up from $1.29 last year. Ad revenue for the quarter reached $1.41 billion, above expectations of $1.34 billion, and up 68% on the year.

Guidance for the fourth quarter was equally strong.

Its profit margin for the third quarter was a little soft at 59.5%, against a Wall Street consensus of 62.1%.

In the second quarter, AppLovin sold its mobile games to focus on its fast-growing and high margin mobile advertising business. AppLovin’s games showed stagnant growth and came in at an adjusted earnings-before-interest-taxes-depreciation-and-amortization margin of around 20%. The ad business has double-digit growth and a near-80% adjusted Ebitda margin. The sale has reduced the size of the company, but it has also changed the growth and margin profile for the better.

AppLovin has a niche ad platform for mobile apps, one of the final frontiers of rapid digital advertising growth. This has been an underserved market for a long time, especially in mobile games, and AppLovin leads this less saturated category.

But there is now a chorus of short reports that began to roll out in February that allege that AppLovin uses a variety of questionable techniques to achieve those high ad-sales growth rates. The allegations include the use of nonconsensual app downloads, tracking minors, and misusing data. If true, some of these allegation appear to represent violations of the terms of service for the Apple and Google app stores, and neither has sanctioned AppLovin.

In a statement to Barron’s an AppLovin spokesperson called the charges “false and misleading.”

“Even worse, the sources of these reports have clear financial motivations that we encourage you to consider, as well as other third-party sources that have pointed out why the information and allegations in the various reports are fundamentally flawed.”

These claims came to a head in October, beginning with an anonymously sourced Oct. 6 Bloomberg article which stated that the SEC was looking into AppLovin’s data-collection practices. The stock was down 14% that day.

The company told Barron’s that it wouldn’t comment on potential regulatory matters.

Then on Oct. 19, the New York Post published a report, also anonymously sourced, that several state attorneys general were investigating AppLovin based on allegations from the short reports. The stock was down 7.8% over the next two days. AppLovin told the Post that it has “not engaged in any investigations with any state attorneys general regarding its business; nor has the Company been contacted by any state attorneys general regarding any such alleged investigation.”

It has since recovered some of those losses. AppLovin shares were up 91% this year at today’s close, while the S&P 500 index was up 15%.

Write to Adam Levine at adam.levine@barrons.com