AppLovin Drops 14%: Should Investors Worry About SEC Probe?

While AppLovin NASDAQ: APP has been a standout performer over the past year, the stock has also been no stranger to volatility. Year-to-date, AppLovin shares have delivered a total return of approximately 300% over 52 weeks. However, there have been seven trading days during that period when shares declined by 10% or more. Many of these steep drops came due to short reports that targeted the advertising technology company. They alleged that AppLovin was “impermissibly extracting” proprietary data from companies like Meta Platforms NASDAQ: META. AppLovin allegedly used this data to improve its ad targeting, driving demand for its services that may not have manifested otherwise. Such reports caused shares to see massive single-day losses in February and March. However, the market clearly brushed these issues off; shares have more than doubled since the end of March. Now, AppLovin is being hit with its latest controversy: a potential SEC investigation. This news sent shares down by 14% on Oct. 6. So, how worried should investors be about this? Is this news simply smoke and mirrors clouding AppLovin’s incredible ascent? Or is it a serious issue that is worth selling the stock over? AppLovin, Apple, and the SEC: Breaking Down the Potential Probe As first reported by Bloomberg, the SEC is conducting a probe into AppLovin regarding its data collection practices. However, at this point, the regulator has not confirmed the probe or accused AppLovin of any wrongdoing. The potential probe centers on accusations that AppLovin violated platform partnership agreements with companies like Apple NASDAQ: AAPL. This involves potentially using practices like device fingerprinting. People cannot "opt out" of device fingerprinting like other tracking methods. This could have helped AppLovin create profiles on individuals that they otherwise could not have, thereby targeting them with ads. This is important, as Apple has banned iOS applications from using device fingerprinting. AppLovin’s business is largely centered around getting users to download gaming apps through Apple’s App Store. Due to AppLovin’s dependence on Apple, violating its rules would pose a significant risk to the sustainability of AppLovin’s business model. However, some suggest that although Apple has banned device fingerprinting, the company puts in limited effort to enforce this rule. Companies like Meta and Spotify Technology NYSE: SPOT may have ignored Apple’s device fingerprinting rules. This provides multiple signals. First off, if AppLovin is using device fingerprinting, other companies may be as well. This suggests that the tactic may not create a unique competitive advantage for AppLovin. Thus, not doing so in the future might have a limited impact on their business. However, the SEC’s involvement in AppLovin’s situation suggests it is beginning to take a more active role in privacy enforcement. The SEC could choose to make an example out of AppLovin due to this, causing reputational risk for the firm. Analysts Boost Targets in the Face of Bloomberg's Report Still, analysts appear to be relatively sanguine regarding the potential SEC probe. Bloomberg Intelligence analyst Nathan Naidu says that the biggest risk from an SEC probe is a financial penalty. The largest penalty the agency issued in fiscal 2024 was $100 million. This is relatively small compared to the $2 billion in annual free cash flow the company is generating. Naidu believes that the bigger financial risk to AppLovin is a class-action lawsuit that could involve $750 million in fines. Additionally, multiple Wall Street analysts issued strong price targets on AppLovin after the Bloomberg report. On Oct. 7, Oppenheimer issued a $740 target on the stock. Meanwhile, Royal Bank of Canada placed a $700 target on Oct. 13. Additionally, Wells Fargo issued a $633 target on Oct. 14. The average of these targets comes in at $691. That figure implies approximately 17% upside potential compared to AppLovin’s Oct. 14 closing price of around $590. This is significantly more bullish than the MarketBeat-tracked consensus price target of $592. Clearly, analysts are not particularly phased by this damaging report. AppLovin’s Legal Issues: Added Risks Against an Overall Positive Outlook Overall, the potential SEC probe and AppLovin’s class action lawsuit do represent material risks to shares going forward. However, multiple factors highlighted above signal that these risks are not commensurate with the huge drop in shares seen on Oct. 6. Until these risks become more substantiated or other cracks emerge, the outlook for AppLovin continues to be a positive one.Should You Invest $1,000 in AppLovin Right Now?Before you consider AppLovin, you'll want to hear this.MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and AppLovin wasn't on the list.While AppLovin currently has a Moderate Buy rating among analysts, top-rated analysts believe these five stocks are better buys.View The Five Stocks Here