Why Digital Turbine Stock Likely Won’t Rally Anytime Soon

Investors pondering whether to purchase Digital Turbine (NASDAQ:APPS) stock must consider a few factors. 

The AppLovin (APP) info on an iPhone and laptop screen.

Source: T. Schneider / Shutterstock.com

First, they have to determine whether they think  that growth stocks, including Digital Turbine, will fare well as 2021 winds down. That isn’t a simple question to answer, but there are some clues that point towards a less-than-optimistic outcome. 

Second, there is the question of whether Digital Turbine’s meteoric rise and recent results indicate that it can continue to make money from mobile ads. I think the answer to that query seems questionable as well. 

Let’s dive deeper into those two questions and see why Digital Turbine’s shares are likely to move sideways going forward.

A Huge Rally

APPS stock burst onto the markets, rising from $6 in May of 2020 to above $90 in early 2021. 

Then the shares dropped sharply. The stock’s retreat was partially due to a fundamental shift in investors’ sentiment towards growth stocks at that time. A CNBC article which leveraged the thinking of Steve Chiavorone, strategist and VP of Federated Hermes, outlines the gist of the shift: 

“I can’t consume that much more of tech and growth goods this year versus last year, but boy, can I consume a lot more travel and entertainment and restaurant goods,” he said. “Those are things where we think that incremental news flow is going to benefit value and we think there’s some catching up to do. Longer term, we think they both do well, but for ’21, we still feel pretty good about value over growth.”

Remember, that was published in March when a reopening of economies felt imminent. Now that Covid-19 hospitalizations are climbing and it feels like 2020 all over again, where do we stand?

In my estimation, we’re sitting on the cusp of another reopening. Assuming that, in such a scenario, consumers will purchase more reopening goods and services than ads and digital services, another reopening won’t help Digital Turbine.  The company, after all,  makes money from digital ads. 

Digital Turbine Is Succeeding, But…..

Digital Turbine’s recent earnings report on Aug. 9 indicates that the company is presenting an interesting contradiction. Because while it performed well, there are indications that it may not do so well moving forward. 

Digital Turbine reported 104% year-over-year revenue growth, including pro forma contributions from two companies that it had acquired:  AdColony and Fyber.  Digital Turbine’s cumulative top line for last quarter came in at $292 million. 

It’s tough for investors to turn their noses up at 104% revenue growth. And all indications are that investors have not done that. Rather, the price of APPS stock has risen since Aug. 19. 

But Digital Turbine provided revenue guidance for the current quarter of between $300 million and $306 million. 

If the company meets that guidance. its top line will have increased 2.74%-4.79% quarter-over-quarter. 

The market does not tend to reward growth stocks whose revenue increases less than 5% sequentially because investors expect growth companies to deliver much higher sales increases. 

The Bottom Line on APPS Stock

While the broader ad revenue market may be poised for long-term growth, there are signals indicating that Digital Turbine’s shares won’t rise in the near-term. 

Assuming that consumers won’t continue to increase their screen usage and that an economic reopening will materialize soon, Digital Turbine’s revenues won’t climb rapidly. 

I’m also judging the company’s prospects based on the guidance that it provided. If the company meets its guidance, investors won’t rush to buy APPS stock.

In fact, in such a scenario, investors are much more likely to head for the exits. That’s why I expect APPS stock to move sideways in the near-term.

On the date of publication, Alex Sirois 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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