Multiple Catalysts Will Drive Digital Turbine Stock Higher

After Digital Turbine (NASDAQ:APPS) posted its fiscal first-quarter results, investors appeared to be disappointed by its earnings. APPS stock fell after the earnings report, despite providing good fiscal Q2 guidance. Indeed, the mobile advertising platform firm has multiple catalysts ahead that will sustain the company’s growth.

MacOS app icons

Source: Apple.com

The Street is shortsighted as usual and fails to realize that Digital Turbine is a sleeping giant. Skeptical investors are worried about its shallow moat in the mobile ad space. Will Digital Turbine overcome those fears?

Strong Guidance To Lift APPS Stock

In its Q1, the company’s revenue soared 260% year-over-year to $212.6 million. Including Fyber and  AdColony, two companies that Digital Turbine acquired, its Q1 revenue, excluding certain items, was $292 million. Its Q1 EPS, excluding certain items, came in at 34 cents.

Its CEO, Bill Stone, said that the company’s platform model had benefited from operating leverage. Also, he said that Digital Tubine   “completed the acquisition of full-stack, end-to-end platform capabilities that we believe strategically position the Company for continued prosperity well into the future.”

In the current quarter, Digital Turbine expects revenue in the range of $300 million – $306 million. It predicts that its adjusted EBITDA will be $44 million-$46 million, while EPS, excluding certain items, is expected to be 38 cents.

Multiple Catalysts

Digital Turbine has multiple tailwinds ahead. Samsung Electronics (OTCMKTS:SSNLF) will launch Digital Turbine’s SingleTap instant-app-installation system globally. The company’s efforts to build a protective moat around its core business will pay off.

In the last few years, Digital Turbine has focused on facilitating app installations through partnerships with Samsung and other telecommunication firms. Samsung sold 57.9 million devices last quarter.

On July 29, Digital Turbine announced an expansion of its app-distribution partnership with TikTok to North America. Under the deal,  TikTok will get a one-stop platform for app distribution. Mike Gubman, TikTok’s Head of Distribution for North America, said, “Having a single point of contact for app distribution will accelerate our growth and simplify management, reporting and optimization of spend.” The ease of Digital Turbine’s offering should attract more big clients like TikTok.

The Content Media business of Digital Turbine grew its sales by 150% YOY. Later this fiscal year, Digital Turbine will launch additional content products on the networks of AT&T (NYSE:T) and Verizon (NYSE:VZ).

Fyber’s Q1 results were more impressive than the markets realize. The unit’s revenue grew over 200% YOY. It booked 90% of last year’s revenue and triple its 2020 adjusted EBITDA in just six months of 2021. Furthermore, Fyber’s advertising volume grew more than 60% YOY.

Fair Value

On Wall Street, analysts’ mean one-year price target for APPS stock is quite bullish,  coming in at $107, according to Tipranks. The stock now trades at five times the firm’s sales, based on an annualization of its Q1 revenue.

Investors who prefer bigger players may consider The Trade Desk (NASDAQ:TTD) instead. Its revenue more than doubled YOY to $280 million. TTD stock, however, trades at a market capitalization of around $40 billion. The market capitalization of APPS stock is  around one-eighth of that.

Using a 5-year discounted cash flow growth exit model, APPS stock is still worth almost $70 per share, assuming annual sales growth of 2%.

Metrics Range Conclusion
Discount Rate 9.5% – 8.0% 9.00%
Perpetuity Growth Rate 1.5% – 3.0% 2.00%
Fair Value $59.84 – $90.79 $67.23

Model courtesy of finbox

Readers may adjust the chart’s metrics. At higher growth rates, the stock’s fair value will increase.

Risks

Apple’s advertising policy could limit the effectiveness of Digital Turbine’s AdColony unit, as explained here. This phenomenon could hurt  the division’s overall revenue. Still, AdColony is less than 20% of Digital Turbine’s total sales. With advertisers continuing to taking a wait-and-see approach towards AdColony, the unit’s performance may improve.

The company may be slow to realize cost savings from its acquisitions, hurting its margins in the near-term. So far, the company’s acquisitions of AdColony and Fyber have been positive for its financial results.

The Bottom Line

Digital Turbine is trading at an above-average price-earnings ratio.  So investors should wait for another quarter of strong results from the company before accumulating its shares.  As the stock resumes an uptrend, investors can seek to build a bigger position over the next few quarters.

The mobile advertising market is thriving and will keep growing. Technology investors should consider buying APPs stock.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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