September 28, 2022

Digital Turbine Stock: Rapid Growth with Low Margins (NASDAQ: APPS)

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Investment thesis

Digital Turbine (NASDAQ: APPS) is a fast-growing technology company primarily focused on mobile advertising. Several people have mentioned Digital Turbine in the comments of other articles requesting an write-up on the company. They were very optimistic about the long-term business, so I thought I’d write an article about the business. Stocks have had a rocky start to 2022 and are down more than 30% year-to-date. The company made a few acquisitions in 2021, which helped drive revenue growth but hampered profitability.

Valuation is currently reasonably attractive, with shares trading near a 25x earnings multiple. Projections show impressive expected EPS growth over the next two years and the chairman of the board recently bought shares in the $30 range. Mobile advertising has age-old tailwinds, but the main reason I haven’t bought stocks is the margin profile. If you’re not as concerned about the margin profile or think EPS estimates are likely to be low, shares of Digital Turbine are a solid buy at current prices.

Deals

Digital Turbine is profitable, which sets it apart from many other high-flying tech stocks. Margins and earnings actually declined in the first nine months of FY21 (Digital Turbine’s year-end is March 31), despite impressive revenue growth. This is likely due to the acquisitions of Fyber and AdColony in 2021, which boosted revenue but weighed on margins.

Acquisitions of digital turbines

Acquisitions 2021 (digitalturbine.com)

I’ll be watching to see what the year-end results look like when they’re released in a few months. I’m curious to see what the margins look like for the full year, because that’s the main sticking point for me right now. I really like the revenue growth, but the low operating margins keep me waiting for now. If things look significantly better for the last quarter of FY21, I will look to start a position, especially if the stock remains close to the current price.

Digital Turbine’s uptrend is built on continued revenue growth. Based on the secular tailwinds for the mobile advertising industry, the company should be able to grow revenue well beyond a 20% clip for several years. If you think revenue growth is going to continue at an impressive pace and some of that revenue growth will eventually trickle down to bottom line via margin expansion, stocks are attractive on a valuation basis. current.

Evaluation

Digital Turbine shares are currently trading at a reasonable price of 25.5 times earnings. Since turning profitable in 2019, stocks have had an impressive run. If earnings continue to grow at a rapid pace, buying stocks in the $40 range will look very cheap in a few years. If the company can grow revenue and net income to a projected EPS of $3.30 in 2024, I think the shares are very unlikely to be stuck in the $40s. If they manage to beat the earnings estimates, I think we could see the shares go much higher in a few years based on the company’s fundamental growth.

P/E digital turbine

Price/Earnings (fastgraphs.com)

Other contributors aren’t the only ones bullish on Digital Turbine right now, either. Board Chairman Rob Deutschman recently bought $470,000 worth of shares when they were trading at $31.66. If stocks fall into the 20 or 30 range, that’s when I would upgrade my rating to very bullish. I think that’s entirely possible with the volatility in the markets over the past two months, but I’ll definitely keep Digital Turbine on my watch list to see what happens with the stock price.

Conclusion

Digital Turbine is a growing company in an industry with centuries-old tailwinds. More phones and more products/services will drive continued revenue growth for the business. Acquisitions made in 2021 will likely benefit the business in the long term but have impacted profitability in the short term. That’s the main reason why I’m still waiting on the sidelines. Margins aren’t that attractive, but if they start to rise, stocks could have a significant advantage over the next two years. I will probably expect year-end results to be released within the next two months.

The valuation is quite attractive for Digital Turbine considering revenue growth and expected EPS growth over the next two years. With an earnings multiple close to 25x, I think the stock is a buy today, but a bigger margin of safety can be had if the stock drops into the $30s. The Chairman’s large insider buying at $31.66 seems to suggest that insiders are coming to the same conclusion with the company’s valuation. If you think margins aren’t an issue and rapid growth is likely to continue, shares of Digital Turbine are a solid buy near $40.