Digital Turbine Stock: The Bubble Is Still Bursting (NASDAQ:APPS)

Investment Thesis

Digital Turbine, Inc. (NASDAQ:APPS) has continued to underperform by -6.57%, since our previous Hold analysis in June 2022. In the meantime, with the worsening macroeconomics and analysts continually slashing estimates, we expect the stock market to remain pessimistic for a while longer. Other software/ mar-tech companies such as Microsoft (MSFT) and Salesforce (CRM) have both embarked on cost-cutting strategies while laying off workers. Evidently, top-line growth continues to be impacted post-reopening cadence. With more and more companies tightening their belts and the rising inflation remaining sticky, APPS’ stock performance may further languish ahead.

There are also minimal catalysts for recovery, since the Feds are expected to aggressively hike interest rates through 2023, with 92.3% of analysts projecting a 75 basis points hike in November and likely, December as well. The terminal rate may also be raised to over 5%, beyond the original projection of 4.6%. Analysts also predict a 100% recessionary chance, with the world already in the midst of the worsening geopolitical storm.

Nonetheless, we continue to be bullish about APPS’ prospects, due to the ongoing digital transformation post-COVID-19 pandemic. The lower ad-tech spending is only temporarily impacted, with things optimistically picking up by 2024 once macroeconomics improves and consumer demand returns. This time of maximum pain only gives interested investors an attractive entry point for long-term investing and portfolio growth. The time to add is soon.

Mr. Market Continues To Be Bearish About APPS Forward Execution

For its upcoming FQ2’23 earnings call, APPS is expected to report revenues of $175.7M and EBIT margins of 11.3%, indicating notable QoQ declines of -6.83% and -1.7 percentage points, respectively. Thereby, impacting its profitability, with net incomes of $34M and net income margins of 19.4% for the next quarter. It represents another fall of -12.14% and -0.9 percentage points QoQ, respectively. As a result, impacting its FQ2’23 EPS by -10.52% QoQ to $0.34.

However, APPS investors must not be discouraged, since the company is still expected to report improved Free Cash Flow (FCF) generation of $37.9M and an FCF margin of 21.5% for FQ2’23. This is mostly attributed to its reduced capital expenditure and improved synergy from its acquisitions. Thereby, potentially indicating an excellent QoQ improvement of 25.49% and 5.5 percentage points, respectively. The company also continues to put its excess capital to good use by repaying $60.5M of its debt obligations in FQ1’23, indicating a -9.7% moderation in its long-term debts to $472.98M.

Meanwhile, APPS is expected to report revenue and net income growth at a slower CAGR of 14.63% and 22.72% over the next two years, respectively, compared to pandemic levels of 132.15%/59.92%. It is apparent that by now that Mr. Market is more bearish than expected, with the continued downgrades in its top and bottom line growth by -16.90% and -27.37% since our last analysis in June 2022.

Nonetheless, APPS investors must still note that their margins remain relatively excellent, from 21.17% in previous estimates to 19.6% at the time of writing. This is mostly attributed to the worsening macroeconomics impacting ad spending, instead of its fundamental performance. In the meantime, the company is expected to report FY2023 revenues of $753.88M and net incomes of $147.95M, indicating a further downgrade of -11.30% and -17.80% from previous estimates. It is no wonder then, that the stock has continued to underperform after the release of its underwhelming forward FQ2’23 guidance in its previous earnings call.

Nonetheless, we must also point out the astounding growth in APP’s profitability despite the changes in the accounting method, from adj. net income/FCF margins of 12.6%/20.8% in FY2020, to 22.8%/8.2% in FY2022, and finally to 21%/18.5% by FY2024. Furthermore, Mr. Market expects the company to continue its deleveraging efforts by -21.27% in FY2023 and -38.61% in FY2024, indicating a massive moderation of -50.65% from current levels of $398.15 in net debts. Impressive indeed, given the impacted top and bottom line growth over the next year.

Nonetheless, it is apparent that there is still a wide gap with its competitor, such as ironSource (IS), given the latter’s projected profitability of 29.5%/26.2% at the same time. Thereby, explaining the difference in their valuations, with IS boasting an EV/NTM Revenue of 3.43x and NTM P/E of 14.66x, compared to APPS at 2.45x and 10.84x, respectively. In the near term, we expect to see further corrections in APP’s stock valuations as Mr. Market persists in its overly bearish sentiments, with the S&P 500 Index already plunging below its previous June lows thrice.

In the meantime, we encourage you to read our previous article on APPS, which would help you better understand its position and market opportunities.

• Digital Turbine: FQ1 2023 Performance Will Be Key To Its Recovery – Not A Buy Now

So, Is APPS Stock A Buy, Sell, or Hold?

APPS 5Y EV/Revenue and P/E Valuations

APPS is currently trading at an EV/NTM Revenue of 2.45x and NTM P/E of 10.84x, lower than its 5Y mean of 4.60x and 43.62x, respectively. The stock is also trading at $14.07, down -85.02% from its 52 weeks high of $93.98, though at a premium of 15.42% from its 52 weeks low of $12.19. Nonetheless, consensus estimates remain bullish about APPS’ prospects, given their price target of $37.33 and a 165.32% upside from current prices.

APPS 5Y Stock Price

However, due to the above factors, we expect APPS to continue retracing moderately over the next few months, as we enter a brutal stock market winter ahead. Therefore, we rate APPS stock as a Buy, only at the high single digits. Even then, investors need to size their portfolios accordingly in view of the potential volatility.