Digital Turbine (NASDAQ:APPS) has done possibly the biggest round trip of any stock I have ever known. We purchased the stock in 2019 at $1.25, and then it ran up to $100 in 2021. I wish we would have been smart enough to sell the whole position, but we hung own and did sell in the $70s while the stock continued its descent, eventually coming back to the $1.50 range a few weeks ago. Upon beating analyst estimates last week, the stock has rallied 70%, but I think you can make a case for a $10 stock price in the near future.
Digital Turbine’s original business was as a facilitator of app placement on phones. There was a bidding process by advertisers to get good placement on new phones, and Digital Turbine handled that process. It then received payment from the advertisers and remitted 60% of that payment to the telco which operated the phone and kept the rest for itself. For example, if you bought a new phone from Verizon (VZ) it would have apps like Starbucks (SBUX) and Netflix (NFLX) preinstalled on the phone and Digital Turbine was the company that arranged who got what placement on the phone’s real estate. It was a great business with a network effect. The company helped the telco by dealing with the hundreds of advertisers who wanted placement and generating a new, free revenue stream. Digital Turbine helped the advertisers by letting them bid on multiple telcos at once, including Verizon, AT&T (T), Telefonica (TEF), and others.
This business grew at a rapid pace in 2020 and 2021, beating numbers each quarter and raising guidance and driving the stock higher to its peak levels in 2021. Digital Turbine at that point made two large acquisitions which ended up to be ill-timed going into a digital advertising recession over the past two years. The companies it purchased were Fyber and AdColony, one being a sell-side platform representing the Internet properties that could hold ads and the other being a buy-side platform that represented brands that wanted to advertise on this real estate. The company used debt to pay for these properties, and this came back to bite them when digital advertising slumped over the past few years.
The company now has the tools to serve up private app stores, which is becoming increasingly relevant given the pushback that regulators are having with the two major app stores today in Apple (AAPL) and Google (GOOGL). Apple and Google each charge a 30% tax on app revenue collected by companies whose apps are loaded on phones through these app stores. Advertisers are pushing back on these fees, as are regulators recently. This opens up the market for alternative app stores that can be owned by the telcos themselves or other entities. Digital Turbine can charge a lower tax like 10% or 15% and then remit some of that revenue to the telco in a similar fashion to its core app placement business. Digital Turbine is uniquely positioned for this business given its knowledge of the internal plumbing of many of these apps.
Revenue peaked in 2022 at $188 million in the June quarter and dropped precipitously to a trough of $112 million in the March 2024 quarter. EBITDA fell from a peak of $52 million to a nadir of $12 million. At the low point, investors became afraid that the company might not be able to pay back its debt and would have issues as a going concern.
Some of this angst was relieved in the past quarter with revenue beating guidance at $118 million, up sequentially from the prior quarter and $14 million of EBITDA, also up from the previous quarter. The company is now expected to continue growing sequentially, with EBITDA rising to $30 million in the December quarter. The company is prioritizing its cash flow to pay down its debt and as is delevers the balance sheet the stock should continue to rise.
Where do I get my $10 price target from? At a current price of $3.30 the company has a $340 million market cap with $35 million of cash and $390 million of debt on the balance sheet. This translates to an EV/Revenue multiple of 1.3x, EV/EBITDA of 7.7x, and a miniscule P/E ratio of 4.7x. At my $10 price target, the company would have a $1 billion market cap, which would probably go higher as the large mutual funds would be able to buy the stock. At $10 the multiples would be 2.5x EV/Revenue, 15x EV/EBITDA, and a P/E ratio of 14x. These multiples for a delevering company with the network effect that Digital Turbine has are very reasonable. Comparing APPS with The Trade Desk (TTD), the difference in multiples is tremendous. TTD trades at 19x revenue, a multiple that would imply a $110 stock price for APPS! I am not predicting these multiples would close fully, but it gives you some idea of what the market would pay for this type of company.
What are the risks of an APPS investment? The digital advertising market could take longer to come back than I expect. There could be integration issues with consolidating the acquired businesses. There could be execution issues, causing the company to miss earnings and the stock to fall a lot.
In conclusion, I think APPS is a great buy here with lots of upside. The core business should improve when handset sales come back, and the alternative app stores could provide a big boost to the business.
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