Digital Turbine (NASDAQ:APPS) stock is a digital advertising company offering a growth and monetization platform for publishers and advertisers that is installed directly on mobile devices by both top carriers and original equipment manufacturers (OEM).
Looking at its P/E Ratio (TTM) of 110.24 is a first indication that the stock is very highly-priced. Investors seem to agree with this note as APPS stock has had losses of nearly 42% in the past year and is already down around 20% in 2022.
What is the story now that makes shares of Digital Turbine either attractive or still overvalued? There is one correct thesis and I already tend to support the latter one, with more plausible arguments presented below. Interestingly, Digital Turbine made not one, not two but three acquisitions in 2021.
What to Expect Now With the Series of Acquisitions
The three acquisitions Digital Turbine made back in 2021 included AdColony, a firm that provides monetization tools for developers with video, banners, and rich media. Appreciate which is a mobile app marketing platform, and Fyber which develops ad monetization solutions for mobile publishers.
The most obvious outcome now to expect is large economies of scale and synergies that will boost revenue growth and profitability. In the latest fiscal 2022 third-quarter financial results, Bill Stone, CEO of Digital Turbine stated, “We are already seeing both revenue and cost synergies from our acquisitions bearing fruit and it is early days. Our strategy is winning in the marketplace.” It was also named the calendar year of 2021 as a pivotal year. The truth is companies rarely make three acquisitions in a calendar year.
Digital Turbine making these strategic acquisitions saw an opportunity hard to ignore that was aligned with its vision of growth and becoming a key player in digital advertising and marketing.
Speaking of growth, the firm has an impressive history of revenue growth. In 2018, 2019, 2020 and 2021 reported revenue growth was 85.92%, 38.55%, 33.93% and 126.06% respectively. An impressive trend that as a result lead to profitability in 2020 and 2021.
Was the fiscal 2022 Q3 financial results a catalyst to send APPS stock higher? Judging by the 5-day return of nearly 12% the answers is affirmative. Diving deeper into these financial results there are both good and bad reasons to evaluate now.
Fiscal 2022 Q3 Financial Results
The good highlights include revenue reported of $375.5 million, a 324% increase year-over-year basis, and operating income on a GAAP basis of $29.1 million, up 42% year over year. Free cash flow was $36.6 million in this quarter, slightly less than $36.7 million in the previous quarter.
The not-so-good highlights were that GAAP net income of $7.1 million, or $0.07 per share, was lower year-over-year, as in Q3 FY 2021 GAAP net income was $14.5 million, or $0.15 per share. Total costs of revenue and operating expenses increased to $346.34 million compared to $68 million in the same quarter a year ago. A major reason of concern is that operating expenses, as a percentage of revenues in Q3 FY 2022 were 92.2% of revenues.
The firm ends its fiscal year in March and has updated its business outlook for FY 2022 mentioning it anticipates revenue in the range of $1.225 billion and $1.240 billion. Compared to the revenue of $313.58 million for FY 2021 the revenue growth expected is nearly 295%.
Analysts lowered their price targets on APPS stock after the upbeat financial results. Macquarie analyst Tim Nollen slashed the price target from $80 to $70, whereas Maxim analyst Allen Klee also lowered the price target to $108 from $132. I assume the reason for lowering price targets after a strong quarter is mostly valuation concerns.
The Bottom Line
The APPS stock is relatively overvalued based on its PE Ratio (105x) compared to the U.S. software industry average (39.5x). and based on its PB Ratio (9.9x) compared to the U.S. software industry average (4.8x).
The P/E GAAP (FWD) of 139.03 and EV/EBIT (FWD) of 60.53 reflect a significant premium over the median values of the information technology sector. The sector has a P/E GAAP (FWD) of 26.45 and an EV/EBIT (FWD) of 17.81.
I agree with the CEO of Digital Turbine that 2021 was a pivotal year. Investors should monitor revenue growth and profitability in 2022. The sales growth seems to have strong momentum, but profitability is having an unstable trend as in Q2 Fiscal 2022 the firm reported a net loss. Valuation is rich too. Keep an eye on Digital Turbine for acquisitions to work more and bring results.
On the date of publication, Stavros Georgiadis, CFA 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.