Why AppLovin Stock Crashed on Thursday

App-based advertising technology middleman AppLovin (NASDAQ: APP) certainly wasn't feeling any love from the market on Thursday. In fact, investors were outright hating it. Shares closed the day down 9%, peeling back from a recently reached record high.

What gives? A short-seller's claim that the in-app advertising it facilitates isn't as user-friendly as it should be.

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A fair point, but arguably overblown

Most of the blame for today's pessimism belongs to a blog entry posted at Substack, an online platform for publishers of digital newsletters. Edwin Dorsey, a short-seller who manages a Substack publication called The Bear Cave, said that AppLovin's rapid growth has been "fueled by low-quality revenue growth" from ads that don't give clickers what they expect.

Though, I think Dorsey makes some fair points. Some of the ads AppLovin helps deliver are less than ideal, making it difficult for a user to return to the app already in use -- if not outright leading that user to what's effectively a digital dead-end. That's just the proverbial nature of the beast when advertisers and app owners are using the company's somewhat-self-service platform to connect with and monetize over 1.4 billion individual users per day.

But perhaps today's tumble also has at least as much to do with the fact that as of this morning, AppLovin's stock was up roughly 780% over the past 12 months and was ripe for profit-taking. It just needed the right bearish nudge, and someone supplied it.

The bigger bullish case still stands

AppLovin's management should be aware that its technology isn't always working as intended, but it's not a reason to presume the worst about the company's prospects.

Perhaps the bigger worry here is the stock's steep valuation of more than 30 times trailing revenue and over 100 times trailing-12-month earnings per share. Such a frothy price makes it easier for a sell-off to remain in motion once it gets going, as it seemingly has now.

It could take a few days for this bearish jolt to run its full course, further fueled by the big leap made just last week following the release of the company's fourth-quarter results, which included a report of 73% growth in ad revenue during the quarter.

This is still a growth-story stock that isn't too limited by a rich valuation. The bigger-picture bullish thesis still stands despite Dorsey's legitimate concerns.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AppLovin. The Motley Fool has a disclosure policy.