Digital Turbine: Undervalued Based On Imminent Growth Drivers

Digital Turbine (NASDAQ:APPS) stock has had a long journey over the past two years. From a base of $1 in 2018 the stock ran to $100 in 2021 but then fell precipitously this year to the current $14 share price. Is $14 the intrinsic value of the business going into 2023? I would argue not. While the company does depend on the growth of the digital ad market and growth in smartphone sales, both of which are hurting right now, there are also underlying growth drivers that should kick in and lead to faster revenue growth than the market currently expects.

The first growth driver is SingleTap licensing sales. As a reminder, SingleTap is a patent-protected application developed by Digital Turbine that allows users in one app to download another app quickly and efficiently without leaving the first app they are in. This is much more effective than going to the Google (GOOG) (GOOGL) app store and possibly being distracted and not downloading the offered app and also leaving the original app you were in. Using SingleTap results in much higher ratios of app downloads by the advertiser and much higher ROI on the ad campaign. Digital Turbine is currently looking to license SingleTap to social media and gaming companies to use on their platforms. The company announced last quarter that it had secured two big licensing customers, rumored to be Amazon (AMZN) and Epic Games. Facebook (META) has been working with the company for a while to integrate SingleTap into its platform and will likely emerge as a customer in the near future. These partners would give SingleTap wide distribution, which would result in a large incremental revenue stream for Digital Turbine in the future.

One headwind that Digital Turbine has been facing this year is the transition of its Mobile Posse media platform from a prepaid focus to a postpaid focus. Historically, Mobile Posse had been a page of glitzy news stories with lots of ads scattered over the page. For a postpaid version, the company needed a much cleaner page of high-quality news to appeal to Verizon (VZ) and AT&T (T). As a reminder, for these big telecom companies, there are many more postpaid than prepaid subscribers. This transition has caused a loss of ad revenue from T-Mobile (TMUS) who is its big prepaid customer. The company announced on its last quarterly call that Verizon is implementing its postpaid version on 48 of its phones and is expanding that lineup over time. Digital Turbine expects the December quarter to be the trough of Mobile Posse revenue, with sequential growth from there. AT&T is still testing this page and may implement it over time as well, which would be another big revenue stream for the company.

International expansion is another revenue driver that will continue to kick-in in 2023. America Movil (AMX) has been a big customer in Latin America and was joined last year by Telefonica. Telefonica has been slow to add territories for Digital Turbine, but its expansion is expected to kick-in in earnest in the upcoming year. Digital Turbine also has relationships with the Chinese phone manufacturers for their business in India and Western Europe. While foreign businesses usually had lower revenue per device (RPD) than the US business, it is all incremental to the top line.

The final growth driver that has been talked a lot about lately in the concept of alternative app stores. Apple (AAPL) appears to be opening up its app store in Europe next year due to regulations there and this presents an opportunity for Digital Turbine which is expert in running app stores. In the future, we can imagine a Verizon app store where advertisers pay a lesser tax (maybe 10% versus the 30% Apple and Google charge now) and Digital Turbine gets some cut of that revenue. There will likely be many of these alternative app stores, presenting a large opportunity for Digital Turbine. Another similar opportunity is for super-apps on phones, where one app will open to many sub-apps by the same brand. For example, Epic Games will have a super-app under which it will have all of its game apps. This is beneficial for Digital Turbine as these super-apps will have much higher revenue than a typical app. This will increase RPD for the company and expand its revenue stream.

Given these opportunities, I think Digital Turbine is materially undervalued now. APPS currently trades at 7.9x 2023E EBITDA and 9.2x EPS. Once market conditions normalize, I think the company can get back to 15% annual growth. This would lead to a 2024E valuation of 6.6x EBITDA and 7.7x earnings. For a growth company with expanding margins, I think that a 15x EBITDA margin is more fitting. At that multiple, I think the stock could reach $48 a year out or a gain of 240% from current levels.

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