One of the readers of this board asked me what I now think of Digital Turbine (APPS), since I last wrote extensively about it back in August (message #78746). The short answer is that I found today’s price attractive enough to add significantly more shares to my position. Here’s why.
I love that management is transparent about what their organic growth is. They said that their revenue last quarter grew 338% YoY as reported, but “only” grew 63% YoY on a Pro Forma basis. Unlike many other companies that grow by acquisition, where the organic growth number is hidden or hard to calculate, we know right away that the core business grew revenues 63% YoY organically. That’s a higher rate of growth than Cloudflare, which I also own.
We also know that this company is forecasting a positive $0.44 EPS for next quarter, which they will most likely beat, based on their past history. That annualizes to $1.76 EPS, which, at today’s closing price of $48.85, gives them a forward P/E ratio of under 28.0. At their current earnings growth rate, that looks like a bargain to me.
Their NTM revenues look like they’ll be within the $1.2B to $1.4B range. If we take $1.3B as the mid-point, the stock currently trades at a forward P/S ratio of only 3.6! It’s trading more like a low-margin retailer than a high-growth ad tech stock.
Why is that? Well, unlike our SaaS stocks, APPS is in the advertising business, and currently has a low gross margin of only about 31%. This has shrunk from 42% last year, and is a big part of why the stock’s performance has been lackluster this year.
Here’s what management said about margins on the earnings call. The key point is that they have a lot of operating leverage :
----- Begin remarks from transcript --------------
“With your relatively newer business mix, how do you think about your long-term margin opportunity?”
"Yes, Allen. We see enhancements to our margins coming from a few different places. We would see those margins expanding over time as we saw with the existing core device business over time. A couple of areas that we see as catalysts: One is we put new products on; two, as we realize the synergies we’re talking about within our vertical integration strategy, we have more opportunities to expand those margins.
And as we continue to launch and ramp our products like SingleTap and others, we’ll also begin to optimize the yields in those businesses. But to answer your question, we see those margins expanding north of 30%. We do anticipate talking a bit about – more about kind of our growth model on our Analyst Day. But you should expect, over time, those margins to accrete north of 30%, certainly.
The second point I’d make is beyond gross margins is we’re thrilled, as you can tell from our comments about the operating leverage in the business and the expanding EBITDA margins and operating income margins. We see a lot of opportunity in those margins continuing to expand, especially as the new acquisitions begin to kind of fuel some of that increased operating leverage from where they stand today."
— End of remarks from transcript -----
There are, of course, risks with this stock, one of them being that Digital Turbine does not have recurring revenues, like a SaaS company. For me, the risk is mitigated by the fact that I purchased the bulk of my shares at around $6 back in 2019.
Good luck to all,