In-Depth Look: Why Digital Turbine, Inc. - $APPS Is a Strong Investment
This post gives a brief synopsis on why Digital Turbine is a current holding in Brandon's Portfolio.
Business Model:
Broadly speaking, Digital Turbine APPS 0.00%↑ provides an end-to-end platform for brands, agencies, publishers, and app developers to deliver advertising to consumers on mobile devices. The opportunity for APPS 0.00%↑ to scale in this industry is massive. The stock is trading at depressed levels as the market assumes its opportunity to grow will significantly diminish in the future. They have a unique business model where they operate as the medium through which advertisers and publishers interact to generate the best return on total ad spend. Digital Turbines’ incentives are aligned with those of their customers which creates a snowball effect. Digital Turbines’ incentives are aligned with those of their customers which creates a snowball effect. If their customers do well & see a noticeably greater return on advertising dollars, or in the case of a publisher, see more interaction & engagement by using their platforms then Digital Turbine also does well. Substantial value is created on all sides of the transaction. As a result, their partners are further incentivized to continue using Digital Turbines platforms because they are generating a solid return on investment. Digital Turbine also receives some added benefits as their existing customers are the ones acquiring the end consumers for them. This allows APPS 0.00%↑ to keep a percentage of their customer’s profits and grow their network while never paying a dime in consumer acquisition costs.
How Their Products/The Mobile Ecosystem Works:
I will break down the general functionality of how their products work. Digital Turbine Operates the end-to-end platform meaning they control the Demand Side Platforms (DSP), Supply Side Platforms (SSP) & the ad exchange.
Demand Side Platforms (DSPs) are where advertisers go to buy ad space provided by media publishers such as Facebook or Instagram through ad exchanges. Advertisers can leverage the data available in DSP, such as website details or consumer characteristics to successfully target their audiences. Supply Side Platforms (SSP) is the technology platforms used to enable web publishers and digital advertising owners to manage their ad inventory, fill it with ads, and receive revenue Essentially these platforms allow the owners of digital media and publishers to sell their ad space. Ad exchanges are technology platforms that facilitate the buying and selling of advertising inventory from multiple ad networks. Prices for the inventory are determined through real-time bidding. Digital Turbine’s Software has been validated by Market-Leading OEMs and Global Operators. Their Market share is expanding and there is still plenty of room for additional partnerships.
Recent Acquisitions:
Their Recent acquisitions of Appreciate, Fyber & AdColony will allow them to expand their footprint onto more devices and different app stores to scale much faster than in the past. Adding these companies into their product suite should create significant synergies in the future. They can now provide their partners with a fully integrated, seamless end-to-end experience. One should monitor how these acquisitions are playing out in the coming earnings reports. APPS 0.00%↑ Current synergy revenue run rate approached 10% of overall revenues near the end of Q3.
Advertising Landscape:
According to a recent report by eMarketer, Global Digital Ad Spend is projected to grow to ~$876.10 billion by 2026, which represents an ~11% CAGR. Digital advertising will continue to take a share of overall ad spending from traditional.
Ad-spend will ramp back up once the uncertainty surrounding a U.S recession and historically low consumer sentiment fades. Ad-spend will likely concentrate into only the most successful and profitable publishers like META 0.00%↑, GOOG 0.00%↑, AMZN 0.00%↑ , and TikTok for now. However, during a recent investor conference, Digital Turbine CEO Bill Stone alluded that Digital Turbine was insulated more than its peers because everything they do has to generate a return on ad spend. The Good news is that there is very little impact from Apple's changes with IDFA.
SingleTap:
The product that will unlock synergies, FCF growth & allow them to scale the fastest is SingleTap. SingleTap enables smartphone users to instantly install an app to their Android device with a single tap. Management’s vision is to bring SingleTap to a $1B revenue run rate.
A SingleTap Install can be deployed from any mobile website, mobile ad campaign, SMS, email, or social media post, bypassing the noise of the app store environment. This will dramatically increase conversions. They built a product that bypasses the Google Play store and can download an app to your phone with a *Single Tap*. This software is currently on 800M devices. This is a very attractive development for advertisers and publishers. Integrating SingleTap capabilities into the Fyber exchange will make it more attractive for advertisers to bid on Fyber inventory, which in turn should be an overall growth driver for the app growth business. Licensing SingleTap to the largest publishers META 0.00%↑, TWTR 0.00%↑, or PINS 0.00%↑ would also be a huge driver for revenue growth.
In Digital Turbine’s Q4 Earnings Conference Call, CEO Bill Stone mentioned “In the United States, our revenue per device was $2.10 in fiscal '20, $3.30 in fiscal '21, and $4.70 for fiscal '22. Internationally, we're still not where we aspire to be, but we have doubled our RPDs from $0.10 in fiscal '20 to $0.20 in fiscal '21 to over $0.40 in fiscal '22.” The Company is growing well, but not nearly as fast as other high-margin, scaling, software technology companies. They are showing good performance but management isn’t satisfied.
Financials/Valuation:
Digital Turbine has lost ~ 65% of its value YTD and ~80% from its ATH in early 2021. $APPS is currently trading at a substantially lower valuation than it was 8 months ago. Measuring it on a P/E basis relative to its peers it's a bargain. $APPS also has a much higher FCF yield.
Over the past 5 years, $APPS has demonstrated significant top-line growth as well as margin expansion. In the last 5 years, Digital Turbine has a revenue CAGR of ~80%, a Net Income CAGR of ~28%, and a FCF CAGR of ~56% via Finance Charts. It is clear management is focused on scale and profitability. Compare this with their industry peer TTD 0.00%↑ , Digital Turbine is significantly lagging behind the pack. Margins are good but they have the potential to be much higher. However, Investors will know margins are a bit more compressed due to their recent acquisition binge mentioned above.
For those worried about their positive Net Debt position, I would turn your focus to their Free Cash Flow. APPS 0.00%↑ balance sheet comes with ~ $548.82 million in total debt with a mere $126.77 million in Total Cash and Short Term Investments. With Annual FCF sitting at $61.46 million and growing I personally believe their debt levels shouldn’t be a concern for investors. In fact, I suspect we will see a large uptick in FCF in the coming quarters as synergies from the recent acquisitions start to play out. Over time, I believe competent management will deliver substantial shareholder value in the form of buybacks or new acquisitions. Some may see a clouded future for APPS 0.00%↑, however, this is a business model that is built to be asset-light in nature.
Building a DCF I have a fair value target of around $50 per share. The stock is currently trading at $21 which indicates its >50% undervalued with a lot of upside potential.
This price target is my own and should not be used in your investment decision-making. Always do your own research and build your own models.
Long-Term Growth Rate Expectations:
Management has set Long-Term Revenue, Profit, & EBITDA Targets. Given their successful track record, these goals are not inconceivable.
Brief Technical Analysis:
From a Technical Standpoint. APPS 0.00%↑ has comfortably broken out of the falling wedge. A lot more buyers than sellers recently. APPS 0.00%↑ is looking to break through $22 before a potential gap up to $30.
Conclusion:
I believe most of the pain for Digital Turbine has been priced in thus far. We could see a tick lower if their next quarter results massively disappoint investor expectations, but after an 80% sell-off in the stock price, I see more potential for upside than down. While the APPS 0.00%↑ stock price was crashing the underlying business was growing. Maybe Mr. Market got too ahead of itself with this sell-off. We are now given the opportunity to acquire Digital Turbine shares significantly cheaper than 8 months ago. Recently, companies have been missing analysts' earnings expectations but the stocks don’t sell off 20-30% as they did in Q1 for many big names such as META 0.00%↑, and NFLX 0.00%↑. A simple indicator used by investors is when Companies disappoint but don’t sell off, they tend to have the bad news already baked into their prices. These are just my thoughts. This should not be taken as investment advice.