At a cursory glance, mobile technology firm AppLovin (NASDAQ:APP) appears to be a compelling discount. Sure, the nearly 21% implosion from Monday’s opening price is alarming. However, even with that rout, APP stock gained over 461% in the past 52 weeks. With so much growth potential, APP’s correction may be a chance to load up the boat.
Still, the matter that caused the fallout — a series of short-seller attacks — remains largely unaddressed at the granular level. In fairness, research from short sellers need to be taken with a grain of salt. Obviously, these entities have a vested interest in watching their target enterprises stumble. At the same time, having a strong bias against a particular stock doesn’t necessarily negate the quality of the thesis.
Among the accusations leveled against AppLovin, short seller Fuzzy Panda Research brought up the issue of direct downloads. Essentially, the claim is that AppLovin is artificially boosting its own revenue through the installation of apps without user consent. Responding to the allegations, AppLovin CEO Adam Foroughi stated, “[e]very download results from an explicit user choice.”
However, investors might not view Foroughi’s rebuttal as forceful enough as the phrasing leaves open room for ambiguity. Along with other damaging claims that Fuzzy Panda brought up — including the tracking of children — AppLovin faces a possible threat to its revenue streams.
After all, it’s the impressive growth that helped spark the stratospheric rise in APP stock. If that falls apart, the valuation could suffer an implosion.
Another critical conundrum for APP stock is the present technical posture. Since January, APP’s 50-day moving average provided clear support for the price action. However, recent sessions saw shares fall below this much-watched gauge. Currently, APP is sandwiched between the 50 and 200 DMAs, putting stakeholders in a precarious position.
It’s not just about the negative price action. Shareholders who are profitable from a position held earlier may be among the first to bail out. After all, AppLovin is a growth stock — it doesn’t pay dividends. Thus, there’s no reason to hold shares if you anticipate a prolonged winter.
Another headwind that may cloud the overall picture is the statistical backdrop. Under normal circumstances, APP stock enjoys an upward bias. Using data since its initial public offering, a position entered at the beginning of the week has a 52.48% chance of rising by the end of it. Over an eight-week period, this baseline probability rises to 61%.
However, when APP stock suffers severe volatility over a short period — specifically a one-week loss of 10% or more — this baseline probability tilts negatively. One week following the extreme-fear event, the long odds are 52%, which is very reasonable. However, over an eight-week period, this dynamic probability slips to 48%. Also, a week prior, it’s actually down to 36%.
Running a guided Monte Carlo simulation, it wouldn’t be out of the question for APP stock to fall to around $250 over the next roughly two months. For those that want to speculate on the downside, there is a high-risk, high-reward trade to consider.
The options chain expiring March 28 coincides with a sharp break between baseline and dynamic probabilities. Aggressive traders may target the 310/300 bear put spread, which involves buying the $310 put and simultaneously selling the $300 put. Should APP stock fall to or below the short put strike price at expiration, the trader may collect the maximum payout of 85.2%.
Primarily, the risk against the bearish trade above is the prospect of a sustained dead-cat bounce, a prospect that the Monte Carlo simulation is pricing in. Again, it’s a high-risk trade designed for aggressive speculators.
