After digital turbine (NASDAQ:APPLICATIONS) released its fiscal first quarter results, investors appeared disappointed with its earnings. APPS stock fell after the earnings report, despite strong fiscal guidance for the second quarter. Indeed, the mobile advertising platform company has multiple catalysts ahead of it that will support the growth of the business.
The Street is myopic as usual and doesn’t realize that Digital Turbine is a sleeping giant. Skeptical investors worry about its shallow moat in the mobile advertising space. Will Digital Turbine overcome these fears?
Solid tips to increase APPS stock
In the first quarter, the company’s revenue soared 260% year over year to $212.6 million. Including Fyber and AdColony, two companies acquired by Digital Turbine, its first-quarter revenue, excluding certain items, was $292 million. Its first-quarter EPS, excluding certain items, was 34 cents.
Its CEO, Bill Stone, said the company’s platform model has benefited from operational leverage. Additionally, he said Digital Tubine “has completed the acquisition of comprehensive, end-to-end platform capabilities that we believe strategically positions the company for continued prosperity well into the future.”
In the current quarter, Digital Turbine expects revenue in the range of $300 million to $306 million. It expects its adjusted EBITDA to be $44 million to $46 million, while EPS excluding certain items is expected to be 38 cents.
Digital Turbine has several tailwinds ahead of it. Samsung Electronics (OTCMKTS:SSNLF) will launch Digital Turbine’s SingleTap instant app installer worldwide. The company’s efforts to build a protective moat around its core business will bear fruit.
Over the past few years, Digital Turbine has focused on making app installs easier through partnerships with Samsung and other telecommunications companies. Samsung sold 57.9 million devices last quarter.
On July 29, Digital Turbine announced the expansion of its application distribution partnership with ICT Tac to North America. As part of the deal, TikTok will get a single platform for app distribution. Mike Gubman, TikTok’s Head of Distribution for North America, said, “Having a single point of contact for app distribution will accelerate our growth and simplify the management, reporting and optimization of apps. expenses”. The simplicity of Digital Turbine’s offering should attract more large customers like TikTok.
Digital Turbine’s Content Media business grew sales 150% year-over-year. Later this fiscal year, Digital Turbine will launch additional content products on the AT&T (NYSE:J) and Verizon (NYSE:VZ).
Fyber’s first quarter results were more impressive than markets think. Unit revenue increased more than 200% year-over-year. It recorded 90% of last year’s revenue and tripled its 2020 Adjusted EBITDA in just six months of 2021. Additionally, Fyber’s advertising volume grew by more than 60% year-over-year.
On Wall Street, analysts’ one-year average price target for APPS stock is quite bullish, at $107, according to Tipranks. The stock now trades at five times the company’s sales, based on an annualized first-quarter revenue.
Investors who prefer larger players may consider The trading post (NASDAQ:TTD) In place. Its revenue more than doubled year-on-year to $280 million. Shares of TTD, however, trade at a market capitalization of around $40 billion. The market capitalization of APPS shares is about one-eighth of that.
Using a 5-year discounted cash flow growth output model, APPS stock is still worth nearly $70 per share, assuming 2% annual sales growth.
|Discount rate||9.5% – 8.0%||9.00%|
|Growth rate to infinity||1.5% – 3.0%||2.00%|
|Just value||$59.84 – $90.79||$67.23|
Model courtesy of finbox
Readers can adjust the chart measurements. At higher growth rates, the fair value of the stock will increase.
Apple’s advertising policy may limit the effectiveness of Digital Turbine’s AdColony unit, as explained here. This phenomenon could harm the overall turnover of the division. Yet AdColony accounts for less than 20% of Digital Turbine’s total sales. As advertisers continue to take a wait-and-see approach to AdColony, unit performance may improve.
The company may be slow to realize cost savings from its acquisitions, which will hurt its margins in the short term. So far, the company’s acquisitions of AdColony and Fyber have been positive for its financial results.
Digital Turbine trades at an above-average price-to-earnings ratio. Investors should therefore wait for another quarter of good results from the company before accumulating its shares. As the stock resumes an uptrend, investors may look to build a larger position in the coming quarters.
The mobile advertising market is thriving and will continue to grow. Tech investors should consider buying APP shares.
As of the date of publication, Chris Lau had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.