AppLovin has strong fundamentals (53% revenue growth, 88% gross margin) but faces risks from high expectations and an SEC investigation; a 54% drop makes it cheaper but not necessarily undervalued without justified future growth.

McLaughlin. It's " AppLovin". I don't know why I keep thinking about "McLoughlin" every time I hear that name. Guys, this is the most interesting company of all companies. It has dropped by 54%, but here's the confusing part.

Unlike the other two, her business is extremely successful. In the last quarter, revenues grew by 53%. Its profit margins are amazing, reaching 84%. Gross profit margins are impressive at 88%, and the company generated over $4.5 billion in cash last year with sales up nearly 61% over the past 12 months .

A company that achieves such good numbers almost never appears on the list of biggest losers. So what the hell happened?

Okay, three things. First, expectations became insane. When a stock is priced based on absolute perfection or more, even a 53% growth rate can be disappointing. The stock has plummeted by about 20% due to its earnings alone.

Secondly, investors were concerned that the company’s massive expansion into online shopping advertising might slow down. One tracker even counted fewer new advertisers who registered in June compared to the previous month.

Third, there is an active government investigation into its advertising practices. To be fair and accurate, the Securities and Exchange Commission has not accused her of any wrongdoing so far.

It is a real danger nonetheless, but danger is not the same as condemnation.

Now, let's move on to the optimistic scenario. Its ad engine is frighteningly good. It is expanding into the huge world of e-commerce, and its cash flow machine is among the best on earth.

It even sold its old video game business to focus entirely on advertising and opened its platform to everyone. And that's where the magic lies. More advertisers mean more data, which makes their ads better, which in turn attracts more advertisers.

A pessimistic scenario. From a purely commercial perspective. The entire company relies primarily on a single advertising algorithm. If it ever loses its charm, beware. It also relies on Apple and Google, who can change the rules on it at any time.

Those attractive profit margins of 88% will attract very fierce competition. So, how long can this incredible growth actually continue?

So, let's review and analyze the numbers together. Guys , it's a $105 billion company, and the first thing I like about it is that the company is worth $107 billion. This means debts of only two billion dollars.

And look, they generated nearly $4 billion in free cash flow last year, and $1.5 billion over the past five years. Therefore, debt is not a concern for me at the moment.

They are being sold at a price equivalent to 27 times the free cash flow , but remember, if they are growing too fast , that can easily be justified. Don't look at 27 times free cash flow or earnings and think it's expensive.

It all depends on the fundamentals of what the company can achieve in the future.

As I always say in my example, if there are two identical companies, one growing at 3% per year and the other at 20%, which one would you pay a higher price for? Obviously, a company that grows by 20%, all other things being equal , can increase its revenue and profits much faster . This deserves a higher price.

Now, guys, look at this. Their profit margin over 5 years is 37%. Last year it was 65%, compared to their total gross profit of 88% that we talked about. And look at these very high returns on capital.

It's truly unbelievable. Their growth rate has increased compared to what it was 5 years ago up to the last three years. I mean, this company is achieving phenomenal success.

Members of our community are currently classifying it as a buying opportunity. Well, our eight pillars, which is something we see a lot in the technology sector. There are "wrong" marks on the price-to-earnings ratio and free cash flow rate, but everything else is marked "correct".

I am somewhat surprised that they have repurchased almost 10% of their shares. This is not very common in fast-growing companies. But it might be the right move.

Let's take a look at the analysts' estimates here. Triple their profits from $ 16 to $49 over the next five years. This is a tremendous growth rate . What is this rate ? 25% or 30% annually?

I don't even know the exact number. And revenue growth from 8.3 billion to quadruple to 32 billion over the next seven years.

Now, you must remember that these analysts base these predictions on the continuation of the same path. That fear that these companies might suddenly change the way they allow advertising could be a game-changer here.

But again, what is a good price to buy? So, let's open our stock analysis tool. Guys, this is a relatively new company . Therefore, I will warn you that some of my assumptions here are a little questionable in terms of whether I really believe that these things will happen ?

Okay, first, I calculated the revenue growth. I set 10, 15 and 20% for revenue growth, which is still a lot for 10 years, but it could be much better. Profit margin and free cash flow .

Now, guys, here's what's interesting. Their last year was 65% profit and 58% free cash flow . I set 30, 45 and 60% assuming more competition enters and their profit margins won't be as strong.

Next, what price-to-earnings (P/E) ratio will I set 10 years from now? Well, high returns on capital, but the growth rate will have slowed down over the next ten years. Remember , we want a profit multiple for beyond 10 years.

I am still putting in 15, 20 and 25, with my required return of 9.5%.

Before we hit the analysis button, I want to remind you that this company is young and new and relies on a single core business to such an extent that it is difficult to evaluate, but I am showing you my way of thinking here and that is what is really important.

So, I'll press the analyze button. The current share price is $310 per share. I have a low price at 150, a high price at 940, and an average price at 400, which still represents an internal rate of return of approximately 13% based on today's stock price.

The question is: Are my assumptions reasonable enough for the future? Now, a drop in the stock price does not necessarily mean that the stock is cheap. It's cheaper, but it's not necessarily cheap.