This past week has been another letdown to growth investors after Consumer Price Index (CPI) data exceeded expectations. Federal Reserve Chairman Jerome Powell has been under question from both Republican and Democrat senators regarding inflation fears. He has yet again failed to provide any clear answers to the public on when contractionary policies will be set into motion, and growth stocks have suffered as a result. Digital Turbine (NASDAQ:APPS) is one of them, with more than a 15% loss since the start of July — and that’s in spite of a rebound in APPS stock this week.
Investors might wonder what to do with their Digital Turbine investment. I have reason to believe that the stock’s prospects for growth will outweigh inflationary pressure.
A Market Perspective on APPS Stock
The disconnect between the 10-year yield and the S&P 500 earnings yield isn’t a factor that’s new to the market. Excess market liquidity has allowed us to ignore the matter for quite some time. But the panic button has been pushed all of a sudden as inflation fears have spread.
I believe that the Fed model isn’t the appropriate model to use anymore and that the Yardeni model should be the one used as a market outlook tool. The Yardeni model adds expected earnings to the debate, and tech companies’ fate primarily lies on expected earnings rather than realized earnings. The technology sector comprises more than 25% of the S&P 500 index, and it’s growing.
Based on this analogy, I believe that growth will continue outperforming value for the foreseeable future, and Digital Turbine is a stock that may well benefit as a consequence.
Digital Turbine’s Growth Analysis
The company’s impressive core has led to year-over-year earnings growth of 126% as demand for application software has surged. Operating profits have doubled and are now at 18.88% overall; furthermore, normalized net income has increased by an astounding 1475% year over year.
Digital Turbine has decided to use capital generated through 2020 and 2021 to acquire Adcolony, Fyber, and Appreciate to increase its operating capacity and improve ad insertion. By having enough capital to acquire for expansion rather than rely solely on internal development, the company can achieve increased market share faster.
In analyzing value through growth, there are two metrics I’d like investors to focus on, and that’s the PEG and the P/S forward ratio. The PEG ratio paints a picture of the P/E ratio relative to the growth rate. A standard P/E ratio can’t be used for a hypergrowth company, and we thus need to factor in growth; Digital Turbine still trades at a PEG of 0.69, which is below the 1.00 benchmark, it’s therefore evident that growth’s succeeding the stock price.
The price-to-sales ratio of 19.5 is expected to retrace to below the 6 mark. Analysts expect recent acquisitions and the last few years’ earnings growth to spur on sales even further, and we can thus substantiate that Digital Turbine is looking healthy from a topline perspective.
To consolidate the argument, I investigated various Wall Street price targets. The mean price target on Wall Street of $107.60 indicates a 12-month upside worth nearly 70%. The latest big bank to set a price target was Oppenheimer, and they predict that the stock will reach the $100 level.
Takeaway for Investors in APPS Stock
I firmly believe that growth stocks will get past the Fed’s reluctance to communicate their plan to curb inflationary pressure. It’s been evident that trading on expected earnings of tech companies has prevailed in recent years, and I think Digital Turbine will form part of the same moat. The company used its monstrous earnings spike in 2020 to acquire valuable growth assets. Through analyzing multiples, the picture seems promising, and Wall Street agrees.
On the date of publication, Steve Booyens did not hold any long or short positions in any of the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.