(Bloomberg) — Over the past few years, few stocks in the US have been hotter than AppLovin Corp.
The mobile advertising technology company’s shares have soared more than 5,500% since the end of 2022, making them the second best performer in the massive Russell 3000 Index, after Carvana Co. Its market capitalization is now more than $200 billion, up from $29 billion when it went public in April 2021. Not surprisingly, it was added to the S&P 500 Index last month.
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By the numbers, AppLovin seems like a typical tech high flyer. But questions have been swirling around the company for some time.
Short sellers accused Applovin of ad fraud, illicitly tracking children and having deeper-than-disclosed links to Chinese entities. The US Securities and Exchange Commission is investigating its data-collection practices to see if it violated partners’ platform rules to push advertising to consumers, leading the company to shut down a related product. And multiple state attorneys general may be investigating the company, according to a report in the New York Post.
So did S&P mess up by adding AppLovin to the S&P 500? Simply put, no. The index isn’t a stamp of approval. It’s meant to be a reflection of the equities universe at a moment in time. Just ask David Blitzer, who headed S&P’s index committee from 1995 until his retirement in 2019. “Were we responsible to review every company every year? No,” he said.
The S&P 500 has eligibility requirements for size, liquidity and profitability. Measurements of quality or behavior aren’t part of the selection criteria, as is the case for most broad equities indexes. It’s a question that’s relevant now, as a committee at S&P Dow Jones Indices will be looking for a replacement for Electronics Arts Inc. after its leveraged buyout closes, which is expected to happen in 2027.
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“There’s plenty of even large companies that have run frauds that were in an index that got caught and, you know, nobody really kind of looked at the index and said, ‘bad, bad index maker,’” said Kim Forrest, chief investment officer at Bokeh Capital Partners.
The people who choose companies for the S&P 500 are trying to create a reasonable proxy of the stock market. So it’s logical that companies with soaring stock prices would get in.
