2023-09-14 13:23:13 ET
Summary
- Digital Turbine, Inc. stock has fallen significantly since late 2021, along with others in its sub-sector of the market.
- The company reported its first-quarter results in August, with non-GAAP earnings exceeding expectations despite a decline in revenues.
- Revenues are falling due to the loss of a major customer and the underperformance of a product, along with challenging macroeconomic conditions.
- The stock got downgraded this morning at Bank of America and the company's CEO has been selling some shares in September in the equity.
- Has peak pessimism been reached around Digital Turbine yet? An analysis follows in the paragraphs below.
No soldier outlives a thousand chances. But every soldier believes in chance and trusts his luck ."? Erich Maria Remarque.
It has been a long time since I took at a look at Digital Turbine, Inc. ( APPS ) which was a huge winner for my portfolio in 2019 and 2020 before I took profits.
The stock has fallen hard since late in 2021 as have many in this part of the market. The company posted quarterly results last month. Therefore, it seems a good time to circle back to this small cap concern in our deep dive of the week. An analysis follows below.
Company Overview:
Digital Turbine is based in Austin, TX and provides a mobile growth platform for advertisers, publishers, carriers, and device original equipment manufacturers (OEMs). The company provides a variety of products and services to clients. These include ad monetization solutions, programmatic advertising and media content delivery services, sponsored and editorial content media, and a media platform that delivers mobile applications to various publishers, carriers, OEMs, and devices. Digital Turbine also offers direct campaign management products, such as the DT DSP and DT Offer Wall as well as ad monetization solutions that allow mobile app publishers and developers to monetize their monthly active users via display, native, and video advertising. The stock currently trades for around $6.50 a share and sports an approximate market capitalization of just under $700 million.
The company is split into two divisions. On Device Solutions which accounts for approximately two-thirds of overall revenue and App Growth Platform which accounts for the rest. 75% of On Device Solution revenues come from outside the U.S. 40% of App Growth Platform sales come from North and South America while 35% come from Europe, The company's fiscal year ends on March 31st, which means we are currently in FY2024 for Digital Turbine.
First Quarter Results:
The company reported its first quarter numbers on August 8th. Digital Turbine delivered non-GAAP earnings of 18 cents a share. That was three cents a share more than the consensus and came even as revenues fell by just over 22% on a year-over-year basis to $146.3 million, which was just over $3 million above expectations. Revenues were up four percent sequentially from the prior quarter it should be noted. On Device Solution revenues fell 17% from the same period a year ago to $98.3 million. App Growth Platform sales were off 32% from 1Q2023 but were up nine percent sequentially from the previous quarter.
An article recently came out on Seeking Alpha going into why revenues are falling this fiscal year and why the stock declined so hard in 2022. They include the loss of T-Mobile ( TMUS ) as a customer and the failure of its SingleTap product to meet initial expectations. An article at the end of August gave a positive assessment on the potential of SingleTap. A challenging macroeconomic environment and tepid ad spending also have contributed to the decline.
Analyst Commentary & Balance Sheet:
Since second quarter results posted Tuesday, Craig-Hallum ($18 price target) and Bank of America ($12 price target) have reiterated Buy ratings on the stock while Roth MKM has maintained its Hold rating and $10 price target on the shares. It is important to note that Bank of America just downgraded that previous Buy rating to a Neutral this morning and cut their price target from $12 to $8 a share on APPS. BofA's analyst also provided this commentary on the company and its shares:
While management has partially attributed the underperformance to transitory factors (platform consolidation & macro headwinds), investors will likely need to see further evidence of core business stability before allocating into the stock ."
Just over six percent of the outstanding float in APPS is currently held short. One insider sold just over $750,000 worth of shares in mid-March of this year. Three different insiders purchased just under $900,000 worth of new equity collectively in March and May of this year. So far in September, the company's CEO has also sold just over $360,000 worth of equity as well.
At the end of the first quarter, Digital Turbine had just under $60 million of cash and marketable securities on its balance sheet after posting a GAAP net loss of $8.4 million for the quarter. Non-GAAP net income was a positive $18.2 million for the quarter it should be noted. After paying down $5 million worth of debt during the quarter, Digital Turbine had $408 million drawn on their revolving credit facility. Interest expense is running a bit over $7 million per quarter.
2021 Company Presentation
2021 Company Presentation
The company made a series of acquisitions in the first quarter of 2021 right in the middle of the huge IPO/SPAC wave. These purchases cost just north of $1 billion collectively at the time while adding significant capabilities to Digital Turbine. These components have now been fully integrated into the company's architecture and platform.
Verdict:
The company posted a non-GAAP profit of $1.15 a share on just over $665 million worth of revenues in FY2023. The current analyst consensus has profits dropping to 69 cents a share in FY2024 as revenues fall to just under $606 million. Expectations are for earnings to rebound to 95 cents a share in FY2025 on mid-teen revenue growth.
The shares trade for under six times trailing earnings. Revenue and earnings will fall significantly in FY2024, with a rebound in both projected for next fiscal year. Now, if the economy was emerging from recession or faster economic growth lay ahead, I would be more confident in those analyst firm estimations.
I would probably take an initial stake again in APPS if its balance sheet was cleaner. However, since the company has a good slug of debt and the economy looks likely to go into recession by the first half of 2024, I am passing on any current investment recommendations around the stock.
Opportunists seek for a chance. Entrepreneurs make new chances ."? Toba Beta.
For further details see:
Diving Back Into Digital Turbine