Summary
- Due to a decline in ad spending, Digital Turbine suffered a decline in revenue in 2022.
- The company experienced explosive revenue growth, causing a significant increase in the stock price. However, the stock price has declined almost 90% over the last two years.
- The company has extended its contracts with Verizon and AT&T, but the guidance for Q4 2023 shows a decline of 22% in revenue compared to Q4 2022.
- We believe APPS is currently a hold, due to uncertainty in its business.
Introduction
At the beginning of February, Digital Turbine ( APPS ) posted earnings. Unfortunately, they missed on revenue and EPS. In addition, guidance for 2023 isn’t looking too hot right now either, due to these reasons we currently rate APPS as a hold. In this article, we will take a look at Digital Turbine's business and what we can expect in the years to come.
Background
Digital Turbine is a mobile software company, which provides a content management platform for mobile called Ignite. This platform is used by app advertisers, mobile operators, and device manufacturers. Originally the company was founded under the name Mandalay Digital Group, in 2014 the company rebranded itself as Digital Turbine.
The platform can be used by app advertisers to reach their target audience through targeted app installs. In addition, the platform gives the possibility to set up user engagement campaigns. For mobile operators, the platform can be used to pre-install apps on their devices.
The company has experienced explosive revenue growth over the years, which caused the stock price to soar. From its COVID-19 bottom to its all-time high, which are only 1 year apart, the stock price went up 2,700%. Unfortunately, the company has experienced a significant decline in share price over the last 2 years, the stock price dropped from $102.56 back in March of 2021 to $10.75 at the moment of writing, which is a decline of close to 90%.
APPS: Tough Macro Environment
Due to a decline in ad spending, APPS has suffered from a decline in revenue in 2022. While Digital Turbine suffered in 2022, they stay committed to its long-term goals and believe they are well positioned to leverage the next macro-secular trend in digital advertising to its advantage.
In its Q3 2022 earnings call, the CEO acknowledges that digital ad spending has seen a decline in price between 10% to 30% compared to only a year ago. The company realizes that this is a big headwind, but that this headwind will be short-lived.
An interesting statement from Bill Stone, the CEO, was the following, this is the part where he discussed the headwinds in digital ad spending.
We believe this trend is temporary and will rebound for a very simple reason. Since the beginning of the first ad dollar spend hundreds of years ago, continuing to today and ultimately tomorrow, ad dollars have always followed where our eyeballs are. And today, our eyeballs are on our digital devices, and we don't see that changing. In fact, we see that growing.
It is pretty clear that APPS is operating in a challenging environment, but, the company seems to be well-positioned to come out of this situation stronger. In addition, the company extended its contracts with Verizon ( VZ ) and AT&T ( T ).
What To Expect?
First of all, we have to say, growth is slowing down and APPS’s prospects don’t seem to be gaining any traction. Due to weak guidance for Q4 and the above-mentioned issues, we believe APPS shouldn’t be valued as a growth story.
The company was aggressively making acquisitions in 2021, which was pretty unfortunate timing. Most of these acquisitions don’t seem to have had the desired effect. In addition, the horrendous guidance for Q4 2023 shows a decline of 22% in revenue, compared to Q4 2022.
APPS’s SingleTap, which is their flagship product, seems to be losing steam. While this is not solely APPS’s fault and the macro headwinds have been playing a role, the market also became more competitive, which might have caused the decline in pricing as well. APPS seems to be very prone to the weakness of the advertising sector. To us, this indicates that the company and its SingleTap product might not give the company as big of an economic moat as one may have thought. In addition, some big players seem to have gobbled up some market share from the company.
Digital Turbine's Investor Presentation
While a turnaround in the advertising space would be beneficial to APPS, we aren’t sure that APPS will get back to its prior glory.
Financials
Now let’s take a look at APPS financials. As we can see in the chart below, APPS has been able to grow its revenues exponentially over the years, but we saw a slump in 2023 (fiscal year 2023 ends in March for APPS). While gross margins increased further to 49.32%, we believe the company will struggle for a while longer and could see a further decline in revenues and possibly even in gross margin in the future.
While YoY revenue growth and gross profit growth have been very impressive over the last few years, we can clearly see that the company is now struggling. With no signs of the market turning around soon, we believe further revenue declines are likely. Furthermore, when we consider the possibility of a recession, which might last longer than most people think, the company's revenues and profit could be under significant downward pressure for a while longer. As can be seen in the chart below the company saw its first YoY revenue decline since 2016, with a decline of 5.04%, taking into account these might be even worse than expected with Q4 2023 results not out yet.
While the company has some major partnerships such as Samsung ( SSNLF ), Instagram ( META ), McDonald's ( MCD ), and Warner Bros. Discovery ( WBD ), we believe this won’t be enough to generate sufficient additional revenues and profits to turn this company back into a growth story. Now let’s discuss some important metrics, starting with the table below.
Currently, APPS has a 5Y Revenue CAGR of 46.95% showing that Digital Turbine has been able to grow its revenue significantly over the last 5 years, but as mentioned before, we believe this growth is overdone and that this metric will see a decline in the future. Their free cash flow currently sits around 112m, resulting in a 10.43% FCF Yield. In theory, this means APPS could buy itself back in less than 10 years. In addition, operating income declined by 23.54%, and capital expenditure increased further, which isn’t an ideal situation.
Furthermore, Digital Turbine currently has a ROIC of 9.21%, which for a business such as APPS isn’t good at all. This indicates that for each $100 it invests in its business it generates an additional $9.21 in operating income.
When we compare the company to its peers, such as The Trade Desk ( TTD ), PubMatic ( PUBM ), and Magnite ( MGNI ). Digital Turbine’s gross margin is on the low side, with the best performer being TTD with a gross margin of 82.18%.
Technical Analysis
As can be seen in the chart below, APPS had 2 rough years. It looks like the stock is trying to form a bottom here. The stock is currently at an important support level, if the $10.55 support level breaks, further downside till $9.13 is likely. Unfortunately, this would mean the stock sets a lower low, as the November 2022 low would be taken out. In addition, the stock is below all its EMA's on the weekly and on the daily chart. One resistance level one should keep an eye on is the $14.12 resistance level. Furthermore, if the stock is able to break this resistance, it could do a gap fill toward $16.15. If the stock holds the current support, it could be an attractive entry point for a short-term trade. Nonetheless, the stock remains to be in rocky waters.
Conclusion
Digital Turbine had a rough year and these headwinds are likely to continue for a while longer. It remains unclear if Digital Turbine has any significant moat. If the company is able to turn itself around, this would deserve a higher multiple and a 9.20 forward P/E would be a steal. Nevertheless, we believe earnings will decline further.
While the company is at an attractive point based on the TA, we believe it is too early to take a long-term position in the company. Before taking a position, we would like to see the company prove the growth story isn't over yet. As such, we believe the company is currently a hold. That said, we believe the company is worth keeping an eye on. In addition, the current setup could be interesting for people looking for a nice risk/reward swing trade in the short term.
For further details see:
Digital Turbine: Tough Year Ahead