The Strategic Implications of AppLovin and Robinhood’s Inclusion in the S&P 500

The inclusion of AppLovin and Robinhood in the S&P 500 index in September 2025 marks a pivotal moment for both companies and the broader market. This event, part of the index’s quarterly rebalancing, has triggered immediate institutional demand and valuation re-rating, reflecting the mechanical forces of passive investing and the symbolic weight of index membership. Yet, as history shows, such re-ratings often come with long-term risks, particularly for high-growth firms lacking sustainable profitability.

The Mechanics of Institutional Demand and Valuation Re-Rating

When a stock is added to the S&P 500, index-tracking funds and ETFs are compelled to purchase the security to maintain alignment with the benchmark. This “forced buying” typically drives short-term price appreciation. For example, Interactive Brokers (IBKR) surged 34% in revenue growth and traded at a 75% margin after its inclusion, with its valuation expanding due to passive inflows [1]. Similarly, AppLovin and Robinhood saw their shares jump by 7.1% and 7.4%, respectively, in after-hours trading following the announcement [2].

However, historical patterns suggest caution. A report by AInvest notes that newly added S&P 500 stocks underperform the index by about 1.7% post-inclusion, as elevated valuations revert to mean levels [1]. Tesla and Palantir, for instance, faced prolonged underperformance after their inclusions, underscoring the need for companies to justify premium multiples through scalable profitability [1].

AppLovin: High Multiples and Marginal Resilience

AppLovin’s inclusion reflects its dominance in the ad-tech sector, with a trailing P/E ratio of 67.01 and a P/S ratio of 29.89 as of Q3 2025 [2]. These multiples, far above the S&P 500 average, are justified by its 71% year-over-year advertising revenue growth and projected 80% operating margins post-divestiture of its low-margin gaming operations [3]. Institutional ownership of AppLovin has also risen, with analysts noting its status as a “high-conviction AI winner” [4].

Yet, the company’s valuation remains precarious. A Seeking Alpha analysis highlights that AppLovin’s GAAP P/E of 102—well above the sector median of 32—leaves little room for error, particularly given its reliance on volatile ad-tech markets [5]. The challenge for AppLovin lies in sustaining its margins while scaling, a task complicated by macroeconomic headwinds and regulatory scrutiny of digital advertising.

Robinhood: Fintech’s Index Debut and Institutional Embrace

Robinhood’s inclusion in the S&P 500 validates its transformation from a pandemic-era disruptor to a mainstream financial services player. Its stock surged 7.3% post-announcement, with institutional ownership now at 59%, including major stakes held by Vanguard, BlackRock, and FMR LLC [6]. This institutional embrace reflects confidence in Robinhood’s post-pandemic recovery and its pivot toward recurring revenue streams, such as crypto custody and margin lending.

However, Robinhood’s valuation remains opaque. While its market capitalization reached $91.5 billion in September 2025 [2], specific P/E or P/S ratios are not disclosed in the sources. This lack of transparency raises questions about whether its valuation is anchored to fundamentals or speculative optimism. The broader fintech sector, including Datadog (P/S of 19.3), trades at elevated multiples, but Robinhood’s reliance on thin margins and regulatory risks could expose it to mean reversion [7].

Strategic Implications and Long-Term Risks

The inclusion of AppLovin and Robinhood in the S&P 500 underscores the index’s evolving composition, which now favors high-growth tech and fintech firms. However, this shift amplifies systemic risks. The S&P 500’s forward P/E of 19.7—above its 25-year average of 16.4—is largely driven by the Magnificent Seven, which account for 31% of the index’s market cap [8]. AppLovin and Robinhood, while smaller, contribute to this trend of overvaluation, particularly in sectors with uncertain earnings trajectories.

Goldman Sachs’ revised 10-year return forecast of 3% for U.S. equities highlights the consequences of high starting valuations [9]. For AppLovin and Robinhood, the path forward requires not only maintaining growth but also demonstrating resilience in a tightening regulatory and macroeconomic environment.

Conclusion

The S&P 500 inclusion of AppLovin and Robinhood has catalyzed institutional demand and valuation re-rating, but the long-term success of these firms hinges on their ability to justify their multiples through profitability and innovation. As the index increasingly reflects the dominance of high-growth sectors, investors must remain vigilant against the risks of overvaluation and mean reversion. For now, the market’s enthusiasm is justified—but not without limits.

Source:
[1] S&P 500 Inclusion and Its Impact on High-Growth Tech [https://www.ainvest.com/news/500-inclusion-impact-high-growth-tech-stocks-2509/]
[2] AppLovin, Robinhood, and Emcor to Join S&P 500 Index [https://www.barrons.com/articles/applovin-robinhood-and-emcor-to-join-s-p-500-the-stocks-are-rallying-563371e6]
[3] AppLovin: Can 80% Margins Survive Outside Gaming? [https://finance.yahoo.com/news/applovin-80-margins-survive-outside-094035178.html]
[4] AppLovin Stock: Wall Street’s Most Misunderstood AI Winner [https://seekingalpha.com/article/4801078-applovin-stock-wall-streets-most-misunderstood-ai-winner]
[5] AppLovin: Some Strong Fundamentals, But A Premium Valuation Provides No Room For Error [https://seekingalpha.com/article/4801182-applovin-some-strong-fundamentals-but-a-premium-valuation-provides-no-room-for-error]
[6] HOOD - Robinhood Markets, Inc. Stock [https://fintel.io/so/us/hood]
[7] Datadog’s S&P 500 Inclusion: Strong Fundamentals Meet Premium Valuations [https://www.trefis.com/stock/ddog/articles/568585/datadogs-sp-500-inclusion-strong-fundamentals-meet-premium-valuations/2025-07-03]
[8] Are U.S. Stocks Too Expensive? [https://www.troweprice.com/financial-intermediary/us/en/insights/articles/2024/q3/are-us-stocks-too-expensive.html]
[9] Updating Our Long-Term Return Forecast for US Equities [https://www.gspublishing.com/content/research/en/reports/2024/10/18/29e68989-0d2c-4960-bd4b-010a101f711e.html]