Digital Turbine (APPS) has taken an envious seat right in between two of the largest long-term drivers of global growth, serving both cellular network operators and advertisers that want exposure on those networks. Its position has quickly driven the stock from micro-cap territory to a $3.7B market capitalization. And CEO Bill Stone’s focus on diversification across revenue verticals, geography, and strategic partnerships has added a secure level of predictability to APPS’ bottom line.
As the pace of 5G adoption picks up worldwide, so does the need (or perceived need) for device upgrades. The benefits of improving data speeds and reliable connectivity also will unlock the opportunity for more and more applications on more and more devices.
In its most recent earnings call, APPS reported stellar results. Beyond the exponential year-over-year and quarterly comps, what caught my eye was the more than 60 million devices added to Digital Turbine’s ecosystem in the quarter. The record level of adds brings the company’s global footprint to more than 500 million devices. In my opinion, this growth in device adds for the quarter (60%), and the nature of those additions, are beginning to significantly reduce the business risks associated with owning shares of APPS.
Digital Turbine continues to grow the application side of its business, primarily through partnerships with cell carriers and OEMs. Revenues in the app segment grew 50% year-over-year. As these strategic partnerships continue to mount, the concentration risk with any single partner diminishes.
Building these partnerships has also broadened the company’s global footprint. Ramping relations with international players, such as Samsung, Telefónica, S.A. (NYSE: TEF), Nokia Corporation (NOK), and Xiaomi, are driving growth in North America and abroad. There continues to be plenty of opportunity for market penetration around the globe, with Latin America and India being important cornerstones to APPS international expansion initiatives. As a result, international revenues have grown by more than 100% in the past year.
Coinciding with the 5G revolution is the ever increasing move to e-commerce, more specifically, to mobile commerce. This move has been hastened in the near-term by the COVID-19 pandemic, and the trend will persist well into the future as web developers/retailers continue to push customers to their respective device applications. A visit to any major retailer’s website on an Android mobile phone will likely prompt and/or redirect you to its app. Taken one step further, if your phone is an Android, that nudge to download a suggested app is most likely powered by a Digital Turbine solution.
The content side of the business serves as a key growth engine for Digital Turbine’s “re-occurring” revenue. In the most recent reporting period, revenues in the vertical grew 60% year-over-year. Growth in this vertical continues to be driven by advertisers’ appetite for eyeballs, and what better place than our phones? I see the content segment as a largely untapped source of future “organic growth”. This will become more and more evident as the synergies are realized from the absorption of the Mobile Posse.
“Re-occurring” revenues now make up 40% of total revenues, a vast improvement from less than 10% just a year ago. The overall health of the business is improving, while the downside risks are slowly being neutralized. For this reason I remain confident in the 50% five-year growth estimate of 50% accounted for in my valuation. With a PEG Ratio of 1.03, I see plenty of room to run for the shares before long-term valuation ceilings begin to come into play.
“Momentum” also plays heavily into my rankings. Fundamental analysis provides the framework for what a stock is worth under a certain set of growth assumptions. However, for any price target to be achieved, other investors also must recognize the fruitful prospects for the company. As investor sentiment increases, so does the demand for the underlying shares. Measures of momentum and other technical analysis tools provide a way to gauge the level of investor recognition. Charts reveal rising analyst/investor expectations and the presence of modeled catalysts coming to fruition.
Since 2012, Digital Turbine has outperformed the S&P 500 in seven out of the last nine years. Annually averaging 176% more than the S&P 500 over the last three years (188.4% to 11.7%) and 82% over the last five years (94.7% to 12.4%). When adjusted for the current Beta measure of 2.41, APPS has continued to crank out the alpha when measured over the last one-month, three-month, and 12-month time periods.
When referencing a one-year chart, the meteoric rise in APPS is easily apparent. However, with the exception of the COVID-19 drop in March and April’s recovery, the stock stayed relatively flat (end point to end point) through the 1st of June. But since then, it has seen a significant move to the upside.
November was a nice month for the chart as I have observed some healthy consolidation. This makes for confident entry points when entering equity positions that have come very far, very fast. Although the prospect of downside volatility exists (these risks magnified for those with a smaller cap), a sense of calm is now being reflected in the price of APPS. I continue to watch for entry points as the shares test and bounce off their 50-day moving average.
As a refresher, my rankings blend both fundamental and technical analysis. I assign a weighting to factors across both disciplines and those stocks scoring the highest comprise the upper echelon of my rankings. Historically, as an industry, financial analysts have looked at fundamental and technical characteristics of stocks in a vacuum. I find that incorporating both into my models allows me to better avoid “value traps” and “high fliers” with great charts, but no visible earnings to back them up.
Over the last year, Digital Turbine continues to maintain its standing in the top of my rankings, currently beating 97% of the securities in my Best Stocks Now database. I’m “Very Bullish” on APPS and own the stock in my Gunderson Ultra Growth portfolio with a five-year price target of $82.
Being sandwiched between two industries is not always a lucrative place to be, but in the case of Digital Turbine, the tighter the better -thankfully, social distancing does not apply here! Management’s focus on diversifying across all aspects of the business and building recurring revenue are just the right condiments for this high-flier. And please, hold the onion.
Note: All images, unless otherwise noted, show data from the Best Stocks Now database.
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Disclosure: I am/we are long APPS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I collaborated with my Gunderson Capital Management colleague, Barry Kyte Jr., CFA, on this article.