S&P 500 signage displayed at the New York Stock Exchange (NYSE) in New York.
(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 AppLovin logo.Photographer: Gabby Jones/Bloomberg
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.
Stock Market Proxy
“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.
“The index should reflect what’s going on in the overall market,” Blitzer said. “If the technology sector is 38% of the market by market valuation, which probably is about what it is today, then the technology sector in the index should be close to 38%.”
AppLovin is hardly the only company to face problems shortly after being added to the S&P 500. Super Micro Computer Inc. joined in March 2024 but was nearly booted in November after Ernst & Young quit as its auditor over questions about the company’s commitment to integrity and ethics. It also faced an investigation from the Department of Justice and a damaging short-seller report before being removed from the Nasdaq 100 Index. And just Thursday, the stock tumbled 8.7%, making it the second biggest decliner in the S&P 500 for the session, after the company gave a quarterly sales outlook that was significantly below analysts’ estimates.
S&P Dow Jones Indices declined to comment on individual companies or potential index changes. A representative for Super Micro Computer didn’t respond to several requests for comment.
An AppLovin spokesperson said the company doesn’t comment on the existence or non-existence of any potential regulatory matters, adding that it is not engaged in any investigations with any state attorneys general regarding its business.
“As a global public company, we regularly engage with regulators as needed as part of our business operations and compliance efforts, and if we get inquiries we address them in the ordinary course,” an AppLovin spokesperson said in a statement to Bloomberg News. “Material developments in any part of our business, if any, would be disclosed in our public filings and disclosures.”
Dot-Com Memories
That the companies up for inclusion these days might seem to have shakier fundamentals and are being called out by contrarians is a reflection of today’s market. As the artificial intelligence boom barrels ahead, indexes keep setting records and retail investors chase the rally, many stocks are being pushed beyond their fundamental values.
“A raging bull market can allow questionable stocks to run further and faster than they otherwise might,” said Steve Sosnick, chief strategist at Interactive Brokers. “Stocks bubble up to the zone where they can be considered for index addition regardless, or perhaps in spite of, business practices that might prove questionable.”
A similar thing happened in the dot-com era of the late 1990s, when the internet was the buzz and companies like America Online Inc., Global Crossing Ltd. and WorldCom Inc were added to the S&P 500. After the bubble burst, many of those stocks removed as they fell below the thresholds for inclusion. Between October 2000 and January 2002, 10 companies were dropped from the S&P 500 for that reason, Bloomberg News reported in 2002.
“Some of these you see coming, but most of them you don’t,” Blitzer said. “Then you run around quickly to find a replacement.” To make that quick shift, the inclusion committee kept a list of five to six companies that would be eligible for inclusion in a pinch, he added.
David BlitzerPhotographer: Jin Lee/Bloomberg
The S&P 500 inclusion committee does remove stocks that fall out of favor, but the reason is the index’s stability. The idea is to keep turnover low and sector weights consistent. Failing to meet eligibility criteria isn’t immediate grounds for deletion. More than 150 current S&P 500 stocks are below the size required to be added.
Getting Skipped Over
When the committee is weighing the backlash against a buzzy stock, there are signs. When a company isn’t immediately included in the index once it’s eligible, it generally means that the committee is taking time to understand the business. Many stocks have been passed over before eventually being added, including AppLovin, Coinbase Global Inc and Robinhood Markets Inc. In September 2020, Tesla Inc. was passed over and then added a few months later. Carvana and Strategy Inc. are the most recent high-profile examples of companies that qualified but were skipped, at least initially.
“Companies that are clearly eligible for the S&P 500 but initially excluded usually face concerns about volatility, governance, or index balance rather than outright disqualification,” Mark Palmer, an analyst at Benchmark Equity Research, wrote in a note to clients on Sept. 8. “Time and performance often resolve those concerns. MSTR’s absence from the September rebalancing list is best understood in this context,” he wrote, using the ticker symbol for Bitcoin treasury company Strategy, which was previously known as MicroStrategy.
While inclusion in the S&P 500 isn’t meant to be a stamp of approval, there is a sense among investors that it is a key milestone in a company’s trajectory.
“In the short term at least, definitely there is some validation,” said Jake Seltz, a portfolio manager at Allspring Global Investments, whose Empiric LT Equity team has $15 billion in assets. “Generally it’s a vote of confidence when a stock you own gets added to the S&P 500.”
When the committee announces additions to the S&P 500, the shares of those companies generally rise. However, it’s typically because funds that track the index will have to buy the shares to stay current. And that bump doesn’t last — businesses still have to perform well over time to see their stocks rise.
“Index inclusion is a positive for stock price,” said Michael Sansoterra, chief investment officer at Silvant Capital Management, which had $2.9 billion in assets under management at the end of June. “But it doesn’t change fundamentals.”
