Digital Turbine Stock Has Potential, But It’s Not For Everyone

While the pandemic was a human tragedy, it did Digital Turbine (NASDAQ:APPS) stock a world of good. The company has been around for a while, without much fanfare. Then in 2020 suddenly things exploded to extreme levels, especially on Wall Street. After May of that year, APPS stock rallied non-stop 1,700%. This is rarely a good idea regardless of how big the improvement to a business may be.

APPS stock: A digital illustration of software icons surrounding a cellphone.
Source: Shutterstock

In this case sales did soar, but not at the same rate. Management grew revenues 126% over 2019, which is not even close in pace with the stock price. Moreover, revenues were already up 34%, 39% and 86% sequentially stronger prior.

My point is that things did not get as good as 1,700% worth, so expectations for APPS stock grew too tall. Therefore, it’s not a surprise to see it give back a lot of the rally. The bulls did mount a comeback one more time last October. The end result is that now APPS stock is 55% off the highs, but it’s still not one for me.

APPS Stock Has Potential

Digital Turbine (APPS) Stock Chart Showing Potential Base
Source: Charts by TradingView

I am uncomfortable committing risk when it is still almost 400% above the pre-pandemic breakout. Compare this with many stocks with much better financial metrics that dwarf Digital Turbine’s. Consider for example, companies like Meta Platforms (NASDAQ:FB) and Netflix (NASDAQ:NFLX).

I still want to give APPS credit for its strategic moves, as the current digital add market fits its mission. So, like Roku (NASDAQ:ROKU), it was an early mover that has a nice runway ahead.

When I say that it is not for me, it is a risk-to-reward preference. For the right investor it could fit like a glove. APPS carries a very modest price-to-sales metric, so there isn’t obvious bloat. There are critics of its most recent drop in margins, but they are wrong to focus on that now. My issue is more a matter of the stock’s altitude amid the current geopolitical risks. I would much rather buy into a name like Block (NYSE:SQ), which fell into the actual breakout.

I am leery of the exuberance that is still in APPS stock, not so much its business. The business is right in the thick of popular trends: Content creation, delivery and proliferation is a ubiquitous need this decade. This is where everything is going and Digital Turbine covers the important categories.

I may grow to like Digital Turbine’s stock later this year, as management continues to improve. But under these uncertain conditions, I prefer more solid companies. Meanwhile, I still acknowledge that APPS is a momentum stock worth trading.

Digital Turbine Is Exciting to Trade

The charts show that there are buyers lurking below. Therefore, it is likely to rally in the short term, as long as the price stays above $36 per share. Losing that level could bring about a bit of a tizzy to the next support level near $28. Conversely, there will be tremendous resistance in trying to breach above $56 per share.

Yesterday started out as a tough day on Wall Street, but APPS managed to flip the script and close up more than 10%. It would be interesting to see how sustainable that is, as the stock attacks the fail point from Feb. 8. That chart candle looks like an epic fail and it will take a lot of bullish strength to reclaim it. If and when it does, the bulls could have tougher tests near $63 and $70 per share.

The short-term range is wide and this is a fast moving stock. From an investment perspective and just by looking at the 12-month chart it looks close to a bottom. However, I charted a weekly time frame for you to show a much wider range. Using this approach, the potential downside reveals itself and is a bit more scary.

I’m not saying to short the stock, but I am raising some caution. Keep in mind that Digital Turbine stock does not trade in a vacuum. If this global confrontation between Russia and the world escalates, there might be more pain in the indices. And if that happens, APPS stock will lose footing along with the rest. It cannot rally alone regardless of how good a story it has to tell.

On the date of publication, Nicolas Chahine 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.

Nicolas Chahine is the managing director of SellSpreads.com.


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