GOOGL - Greenhaven Road Capital - Digital Turbine: Hits An Air Pocket

Summary

• The Fund’s largest detractor year-to-date is a business where the purchases are more discretionary (fewer forced buyers): Digital Turbine.
• Digital Turbine’s troubles have been customer and product specific.
• There also appears to be a growing opportunity for APPS to operate its own app stores if and when government regulations force to allow competition.
• There are multiple ways to win, so we have held our APPS stock and the losses remain unrealized.

The following segment was excerpted from this fund letter .

Digital Turbine ( APPS )

The Fund’s largest detractor year-to-date is a business where the purchases are more discretionary (fewer forced buyers): Digital Turbine ( APPS ). The entire ad tech sector has seen similar YTD declines of ~70%, driven by a decline in advertising spend and concerns of a recession. The mobile advertising space has also been impacted by Apple’s ( AAPL ) institution of new privacy policies that make targeted advertisements more difficult.

Digital Turbine is well insulated from these privacy changes as the large majority of their revenue is not derived from the Apple ecosystem, but rather the Android ecosystem, and they have on-device software that allows them to identify users. Instead, Digital Turbine’s troubles have been customer- and product-specific.

The most generous description of the current situation is that they have hit an air pocket, but growth should resume. This was hard to anticipate for a few reasons highlighted below – all we know for sure is that growth has come to a screeching halt.

There are two important growth drivers that, at a minimum, have been delayed. The first is the rollout of their Mobile Posse product with AT&T ( T ) and Verizon ( VZ ), both of whom are moving slower than previously forecasted. Given their sheer size and market power, Digital Turbine does not have a lot of leverage with these customers.

The second delay is in generating revenue from partners using the company’s SingleTap technology, which makes mobile advertising more effective by improving app download and open rates. Management has said publicly that companies like Twitter and SNAP are testing the technology, and also that they should start recognizing a small amount of licensing revenue in the third quarter, growing from there.

One of the challenges of owning APPS right now is that it is hard to get transparency into the timing of the adoption of their technology by large partners. We cannot look at competitors and infer progress, and any disclosure from an executive at a large partner would be material non-public information, so we do not seek it.

On a more positive note, the most direct competitor, IronSource ( IS ), is being bought by Unity Software ( U ) in a deal that implies a valuation for Digital Turbine of more than 50% above its quarter-ending price. I believe the deal positions Digital Turbine as a unique independent asset with strategic value to many in the advertising technology/video game tools space.

There also appears to be a growing opportunity for Digital Turbine to operate its own app stores if and when government regulations force Google ( GOOG, GOOGL ) and Apple to allow competition. At the quarter-end price of $17.47 per share, APPS was valued at approximately 14X trailing earnings.

This is a business that has a history of rapid growth and operating leverage, solid unit economics, and a very capable management team. If growth is permanently delayed, this is dead money, but with SingleTap, MobilePosse at Verizon and AT&T, progress on other acquisition integrations, and the possibility of independent app stores, there are multiple ways to win, so we have held our shares and the losses remain unrealized.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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