• Shares of AppLovin sank more than 20% Thursday after short-selling firm Muddy Waters went after the company's ad technology.
• Muddy Waters alleged that AppLovin's ad tactics "systematically" violate app stores' terms of service through "impermissibly extracting" user data.
• AppLovin was the tech sector's best performer of 2024, skyrocketing more than 700%, but Muddy Waters is now the third short seller to publicly pronounce its concerns.

Shares of AppLovin sank 20% on Thursday, their steepest drop on record, as another short-selling firm raised concerns about the company's digital ad technology and claimed that it's violating app store rules.

AppLovin tumbled $65.92 to close at $261.70. The stock soared more than 700% last year, the biggest gain among U.S. tech companies, due to enthusiasm surrounding AppLovin's artificial intelligence technology and the growth it was spurring in its ad business.

But Muddy Waters Research on Thursday became the third short-selling firm to publish a report meant to raise significant investor skepticism. The stock is down 19% in 2025 after Thursday's drop.

The report said that AppLovin's ad tactics "systematically" violate app stores' terms of service by "impermissibly extracting proprietary IDs from Meta, Snap, TikTok, Reddit, Google, and others." In so doing, AppLovin is funneling targeted ads to users without their consent, Muddy Waters said.

"If APP is not deplatformed, logically, numerous competitors will start copying APP's techniques because there is little technology involved," the firm wrote.

Last month, Fuzzy Panda Research was one of two firms, along with short-seller Culper Research, that critiqued AppLovin's AXON software, which drove its earnings growth and stock surge. The shares dropped 12% on Feb. 26, the day of the short reports. Earlier in February, AppLovin reported a revenue and earnings beat.

After the short reports were published last month, AppLovin CEO Adam Foroughi wrote a blog post, defending his company's technology and practices, and taking aim at the short sellers trying to profit from AppLovin's decline.

An AppLovin spokesperson didn't provide a comment on Thursday, referring CNBC to Foroughi's post.

"It's disappointing that a few nefarious short-sellers are making false and misleading claims aimed at undermining our success, and driving down our stock price for their own financial gain, rather than acknowledging the sophisticated AI models our team has built to enhance advertising for our partners," Foroughi wrote. "It's also noteworthy that the short reports emerged after our earnings report, where we would be in a period of being unable to respond with financial performance."

Earlier this month, Fuzzy Panda penned a letter to the S&P 500 inclusion committee reiterating its claims of fraudulent ad tactics and alleging that AppLovin didn't meet the committee's "gold standard." The firm encouraged the committee to keep AppLovin out of the S&P 500.

"AppLovin's recent revenue growth has been based in data theft, revenue fraud, and the exploitation of our country's laws protecting children," the firm wrote to the S&P committee.

One of Muddy Waters' central claims is that e-commerce advertisers are bailing on AppLovin. The firm said that it analyzed 776 advertisers active early in the first quarter and noted that the churn rate was about 23%, while Foroughi "reportedly claims there has been no churn," according to the report.

Muddy Waters said it conducted the churn analysis by looking at e-commerce websites that, on Jan. 3, had AppLovin's AXON pixel. The firm then re-ran those checks from March 24-26, and said it found 21 sites with "broken links," and another 171 that no longer contained the pixel.

The 23% "churn rate is based only on those customers who removed the pixel," the firm wrote.

A representative for Muddy Waters declined to comment.

WATCH: AppLovin shares down after Muddy Waters short