The Bottom Fishing Club: Digital Turbine (NASDAQ:APPS)

Digital Turbine (NASDAQ:APPS) is another beaten down tech stock, that holds great potential for a turnaround in 2023. Today’s valuation setup makes considerably more sense than a few years ago, when investors believed nothing could go wrong in the digital application advertising sector. Then inflation and interest rates took off, and the online ad market encountered a huge hit. Digital Turbine suffered from both a rerating of growth multiples lower and a decline in income, a dreaded double-whammy of problems for owners (which I have discussed in many Big Tech articles since late 2021).

I have not found a personal interest in owning the company until lately. The good news is operations should stabilize in 2023, with very strong results appearing again in 2024-25. While I expect a recession this year will keep operating numbers from mushrooming, a leap-frog effect could be building for next year. If online ad demand comes roaring back after any recession in 2023, with inflation/interest rates falling closer to 3% by early 2024, a springboard jump could be developing, the exact opposite setup of the ugly 2022 experience.

The business model is a cross between an advertising agency and online media, with unique application software licensed to OEMs and smartphone wireless providers.

I am not an expert on the operating business focused on smartphone usage and application downloads but Seeking Alpha contributor Cobiaman seems to have a good handle on the upside operating arguments. In an article posted in late December here, he explained the multi-faceted growth story and reasons for bullishness under $20 a share. If you are interested, I recommend reading his full report, but his summary section below explains the main points:

Digital Turbine has underlying growth drivers beyond the macro digital advertising market.

SingleTap licensing will drive growth in 2023.

Mobile Posse postpaid version will be a growth driver as well.

International expansion will continue to increase revenue.

White label app stores are potentially an explosive growth avenue.

Valuation Story

DT’s diversified angle for growth in sales and profitability is relatively unparalleled for investors in the digital ad and app licensing space.

Earnings estimates by Wall Street analysts paint a very rosy long-term outlook for the business, with strong expansion resuming next year. In my view, paying 12x projected cash earnings this year and 11x for 2024 is a sound buy argument, assuming growth rates above 15% are the future in the next economic expansion. Using either GARP (growth at a reasonable price) or PEG (P/E divided by annual growth rate) analysis, Digital Turbine now looks like an undervaluation candidate on fundamentals.

Basically, DT’s enterprise valuation (including debt + equity – cash holdings) is near its lowest in the company history. Below is a graph comparing core EBITDA (earnings before interest, taxes, depreciation and amortization) plus revenue multiples since 2018 (when EBITDA showed up).

Looking at forward 1-year P/E ratios, Digital Turbine is essentially tied for the cheapest out of the group of peer enterprises. I have drawn comparisons to an eclectic group of social media, digital advertising, and application software firms. Only Magnite (MGNI) is less expensive, with its expanding focus selling advertisements on streaming media platforms. I also wrote on Magnite in a bullish December article here.

Technical Chart Review

The stock peaked during the U.S. government’s money printing boom in March 2021 at $102 per share and fell all the way down to its low in November 2022 under $11. The complete bust is a testament to how amazingly absurd, bullish thinkers were able to outbid each other during the Federal Reserve money giveaway in 2020-21 (to fight the COVID-19 pandemic).

In November, the company was able to retrace some losses back to $20, with one big round of accumulation, largely on earnings results that met expectations with no material downgrade for guidance. For months now the share quote has been backfilling this large advance on very light volume. Could it be selling has been exhausted?

Below I have drawn a 1-year chart of daily price and volume changes. The first thing to notice is price may be breaking out of a downtrend, marked with the green trendline. Next, I would point out the last 4 weeks have witnessed the lowest trading volume since early 2019 (boxed in blue), even longer if you look at volume as a percentage of outstanding shares at the time.

Consequently, very small capital investment has been able to generate a decent price rise in January. A picture of this circumstance is highlighted by the 20-day Chaikin Money Flow reading. If a reason to buy appears, like stronger than expected earnings, a lack of overhead share supply could help price to an oversized advance.

The Accumulation/Distribution Line reversed a consistent downtrend in November (marked with a red arrow) and is continuing higher. I count this change in behavior as a serious signal sellers may be out of ammunition. Lastly, the 14-day Average Directional Index is the lowest since 2018 at a score of 10. Such is indicative of a balance in supply/demand. The previous 2018 low reading occurred right before a major price bottom (not pictured).

Final Thoughts

What are the risks on your investment in Digital Turbine? The biggest risk is a major recession, which has decent odds of playing out soon. Even weaker advertising demand on wireless access and smartphone usage could theoretically push the share price back to $12, filling the price gap created in November. However, I would view such a scenario as Strong Buy territory for forward thinkers.

What upside potential realistically exists? I am modeling a 20x P/E on $2.00 EPS in 2025 (slightly better results than now expected on Wall Street) could produce a $40 quote equal to a terrific +125% performance return over 24-36 months.

More immediately for a 12-month outlook, $27 for a “fair value” target price is possible with $1.65 for EPS (again slightly stronger than now forecast) and a more reasonable growth-based P/E around 17x cash earnings (about the same as the S&P 500 average currently). That’s +50% upside potential in a best-case scenario vs. -30% downside as a worst-case projection.

I rate shares a Buy, with a chart pattern and trading characteristics adding flavor to the optimism. My view is Digital Turbine will outperform the S&P 500 over the next 12-month and 24-month periods.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.