The Bottom Fishing Club: Digital Turbine

thinkcreative

digital turbine (NASDAQ:APPS) is another beaten down tech stock with great potential for a turnaround in 2023. Today’s valuation setup makes a lot more sense than it did a few years ago, when investors believed nothing could go wrong in the digital application advertising space. Then inflation and interest rates soared and the online advertising market took a huge hit. Digital Turbine faced both a lowering of growth multiples and a decline in earnings, a terrifying double whammy of problems for owners (which I’ve discussed in several Big Tech articles since late 2021).

I haven’t had any personal interest in owning the company recently. The good news is that operations should stabilize in 2023, with 2024-25 again showing very strong results. While I expect the slowdown to lift operating numbers this year, a leap-frog effect could form for next year. If online advertising demand returns after any recession in 2023, a springboard jump could develop in early 2024 with inflation/interest rates falling to 3%, the exact opposite setup to the ugly 2022 experience.

The business model is a cross between an advertising agency and online media, with unique application software licensed to OEMs and smartphone wireless providers.

Digital Turbine – company website, about page

Digital Turbine – company website, about page

Digital Turbine – Company website, home page

Digital Turbine – Company website, home page

Digital Turbine – Company website, home page

Digital Turbine – Company website, home page

I am not an expert in operating business focused on smartphone usage and application downloads, but am a Seeking Alpha contributor cobiaman It seems to have a fine control over the reverse operating arguments. In an article posted here in late December, he explained the multidimensional growth story and the reasons for the bullish run to under $20 a share. I recommend reading their full report if you’re interested, but their summary section below explains the key points:

Digital Turbine has underlying growth drivers beyond the macro digital advertising market.

SingleTap licensing will drive growth in 2023.

The mobile pos postpaid version will also be a growth driver.

International expansion will continue to drive revenue growth.

White label app stores are potentially an explosive growth path.

valuation story

DT’s diversified angle to driving sales and profitability growth is relatively unique among investors in the digital advertising and app licensing space.

Earnings estimates by Wall Street analysts paint a very bright long-term outlook for the business, with strong expansion expected to resume next year. In my view, paying 12x estimated cash earnings this year and 11x for 2024 is a sound buy argument, assuming that growth rates above 15% are the future in the next economic expansion. use both Garp (Development at fair value) or peg (P/E divided by annual growth rate) analysis, Digital Turbine now looks like an undervaluation candidate on fundamentals.

Seeking Alpha Table – Digital Turbine, Analyst Estimates for 2023-25 Created January 28, 2023

Basically, DT’s enterprise valuation (including debt + equity – cash holding) is the lowest in the company’s history. Below is a graph comparing core EBITDA (earnings before interest, taxes, depreciation and amortization) and revenue multiplier (when EBITDA was shown) since 2018.

YCharts – Enterprise Value for Digital Turbine, EBITDA and Revenue from August 2018

Looking at the 1-year P/E ratio, Digital Turbine is essentially tied for cheapest among its group of peer enterprises. I compared them to an eclectic group of social media, digital advertising and application software firms. In college magnite (MGNI) is less expensive, with its increasing focus being selling advertising on streaming media platforms. I also wrote a bullish article on Magnite here in December.

YCharts – Digital Turbine Peers, Price to Outpace 1-Year EPS Estimates from Early 2022

technical charts Review

The stock peaked at $102 per share in March 2021 during the US government’s money printing boom and fell to a low of $11 in November 2022. The whole bust is a testament to how amazingly absurd, spirited ideologues were able to out-bid each other during the 2020-21 funding spree by the Federal Reserve (to fight the Covid-19 pandemic).

YCharts – Digital Turbine, Weekly Share Price, 5 Years

In November, the company was able to pare some losses back to $20 with a big round of accumulations, largely on earnings results that met expectations without any material downgrades to guidance. For months now the stock price has been filling this large advance with very small amounts. Could it be on sale?

Below I’ve plotted a 1-year chart of the daily price and volume change. The first thing to notice is that the price may have broken out of a downtrend, which is marked with a green trendline. Next, I’ll point out that the last 4 weeks have seen the lowest trading volume since the beginning of 2019 (boxed in blue), if you look at volume as a percentage of shares outstanding at that time.

As a result, very little capital investment has been able to generate a decent price increase in January. A picture of this situation emerges from day 20. chaikin money flow Reading. If there appears to be a reason to buy, such as higher-than-expected earnings, a lack of overhead stock supply could help price a big advance.

storage/distribution line Reversed a sustained downtrend in November (marked with red arrow) and continues higher. I regard this change in behavior as a serious sign sellers may be out of ammunition. Finally, 14 days average directional index The score of 10 is the lowest since 2018. This is a sign of supply/demand balance. The previous 2018 low reading occurred just before a major price bottom (not pictured).

StockCharts.com – Digital Turbine, 1 Year of Daily Price and Volume Change, Author Reference Point

final thoughts

What are the risks to your investment in Digital Turbine? The biggest risk is a major recession, which is expected to end soon. Even weak advertising demand on wireless access and smartphone use could theoretically push the share price back up to $12, filling the price gap created in November. However, I would look at the scenario like this strong buy Area for forward thinkers.

What upside potential actually exists? I’m modeling a 20x P/E on $2.00 EPS in 2025 (slightly better results than Wall Street is now expecting) to produce a $40 quote equivalent to an awesome +125% performance return in 24-36 months.

Immediate to 12-month outlook, $27 possible for “fair price” target price with $1.65 for EPS (again slightly stronger than forecast now) and roughly 17x cash earnings (about the same) Reasonable growth-based P/E currently as the S&P 500 average). In the best case this is a +50% upside potential versus a -30% downside as a worst case projection.

i rate stocks Purchase, adding flavor to the optimism with a chart pattern and trading characteristics. My view is that Digital Turbine will outperform the S&P 500 over the next 12-month and 24-month periods.

Thank you for reading. Please consider this article as the first step in your due diligence process. It is advised to consult a registered and experienced investment advisor before placing any trade.

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