Digital Turbine (APPS) Stock Analysis (Mid Cap Growth)

Company Profile

In a world where mobile phones continue become a bigger and bigger part of people’s lives, digital turbine and it’s recently acquired companies provide applications and software to allow mobile operators (telecom companies) and OEMs (mobile device manufactures) to monetize devices. 

The original on device software platform is known as ignite and recent acquisitions show how they integrate with the ignite-on-device software.

Below is an infographic showing the diversification of companies being added to digital turbines profile and expand services and become a one stop shop for advertising from a brand new device to app installs to managing advertising campaigns.

The company buying frenzy kind of reminds me of our analysis when we looked into Etsy 🙂 although one difference is a lot of this was done with issuing more common stock to raise capital which lowers the future EPS, but also has rounded out the company in a one stop shop mobile ad platform.

Stock Profile

The company trades at a current mid cap market capitalization of $5.75 billion. The company is expected to grow revenues at a faster pace fueled by the buying frenzy of complimentary companies and macro environment for mobile spending.

Macro Environment

As we have covered in other analysis of gaming and social media companies the trend of mobile usage continues to go up. With all of these eye balls on people’s phones that is where advertisers want to spend money. 

Now you may be asking, well isn’t that what Facebook and Google already dominate? Well yes because they own the massive platforms that have a ton of attention, so they have created business models to sell ad space. But what about companies or apps that are not owned by Facebook and Google? Have you ever played a random independent mobile game and gotten advertisements? Well that is the piece of the pie that Digital Turbine is going after.

As you can see the majority of advertising spend goes to Facebook and Google. The rest is up for grabs! And in a market that is growing of mobile ad spending as the total addressable market goes up, well that $50 billion market share also increases even with behemoths like Facebook and Google (which we own both heavily already in the portfolio :)).

So the macro play here is that mobile devices will continue to grow in popularity across the world and digital turbine as a mid cap company has room to grow in the space along these giants. 

And what is good with mid cap companies is they can offer higher growth prospects although they may come with a little bit more risk and volatility.

Financials

The first thing that jumps of the page is the revenue growth, and if you didn’t realize they went and bought out all these other companies, you would probably be like “WHAT THE HELL 259% YEARLY GROWTH!” and buy shares with both fists!

But actually the company provides a % increase even if you included the other companies that we’re bought previous years financials and the number is % is still impressive at 104% year over year. And Fyber looks to be the winner of the lot.

So the clear play here is growth over cashflow, but the company is still managing to turn a small profit at $14 million. The company also expects that their operating margins should expand as the companies that were acquired synergize.

The one con with all the acquisitions is it looks like they went ahead and raised some debt on the balance sheet as well to make sure they had some working capital to operate the company. They have $83 million in cash vs. $233 million in long term debt. Also the current ratio is 0.52 meaning that they have lower liquidity (current assets/current liabilities). You can see that there is over $300 million in current liabilities from their acquired companies. 

So from a balance sheet perspective, there is less wiggle room  to have a bad year of financials otherwise they may have to get more debt. Good news is that debt right now is cheap! And the cash flow statement shows they already borrowed a net of around $215 million this past quarter.

But I don’t think it is too much of a concern so as long as the company stops buying up companies 🙂 

From a margin perspective it flows in the high single digits to low teens, but the guidance given gives us a little insight into how that may end up in the next quarter and going forward.

So overall growth is the name of the game for digital turbine.

Guidance

The next quarter will be the first time all the acquired companies have a full quarter worth of financials included in the financial statements. Below is what the company provided in their latest quarterly estimates.

Based on this we can arrive at an expected on a $40 million net income off of around $300 million in revenue or a 13% net profit margin. I went ahead and used something like 11.7% for FY fiscal year 2022.

Price Target/Valuation

The big assumptions I used was that the company would get around $1.7 Billion in revenue by end of march 2022 (their fiscal year end), this is factoring all of the companies together. From there I used assumptions from Finbox for revenue growth of 25% CAGR for the next 4 years.

Also assumed a 1% increase in operating margin after 2022 to show some type of efficiency improvement with all the companies and potential synergies.

On top of a DCF using a historical price to sales ratio of around 10 gives me a blended fair value of around $57.31.

See attached model for all details

Now looking at a march 2023 price target (which is pretty far away but can give of as idea of where it may be in a year and a half) I used a lower p/s multiple of 6 to factor in the growth slowing down from current expectations, but that also gives a forward target of around $95.65, so that would be around a 36% annualized return.

So overall the stock looks like it may offer some decent upside relative to the S&P 500, but the stock is pretty volatile. But I think I understand why the stock has been trading down to more realistic valuations after being closer to $100 at the beginning of the year and possibly getting ahead of itself.

Risks & Ops

I think the biggest risk is that the revenue growth projected slows down, but I think once you factor in that the company is now multiple companies together that huge increase from 2021 to 2022 in revenue makes a whole lot more sense. If I look at revenue growth of 25% compounded compared to other advertising companies like Google and Facebook it is in line with those expectations as well just a lower starting base revenue.

In general if ad spending decreases due to economy hardship that would also negatively effect the company.

From an opportunity side, I think the synergies of combining these different companies could be undervalued right now in my models and the profitability could be higher (it’s hard to say without seeing multiple quarters where all of the company unites have been in place.

The company is also looking to get into other devices like smart TVs and wearables.

Conclusion

Overall I like the acquisitions the company has made in order to be an ad platform from the moment a mobile device is started up to being a player in the ad marketplace and connecting publishers and advertisers. 

From my perspective mobile is dominating and is an integral piece to most peoples lives especially those of the younger generations. So ad space over time on mobile should become more valuable.

I think around my fair value target of around $57.50 is a reasonable entry point. I’ll be looking to dollar cost average into this company to around 1% of the portfolio around those levels as it allows some exposure to a mid cap growth company. Definitely a higher risk higher reward type of play.

I really wish I had done this before the stock’s inclusion into the S&P MidCap 400 which boosted the stock from lower $50s to $60.