Digital Turbine: High Growth at a Fair Price

If you ran a company that sells apps, how would you get more people to download your software?

Digital Turbine (APPS) solves that problem.

The company’s unique advertising technology makes it easier for consumers to download apps directly from ads without having to search through the app store.

And have you ever noticed how some apps come pre-installed on your phone? You can thank Digital Turbine for that.

In the last three years, revenues have climbed more than 700%.

Operating cash flow went from $1 million in 2019 to $58 million in the last 12 months.

You might be asking why we’re interested in a growth stock in the face of higher interest rates?

It’s simple.

We see a total addressable market of nearly $400 billion. Current sales haven’t even eclipsed $1 billion.

Plus, this is a profitable growth company. And that says something.

Financial pros searched for this small cap 417 times this month, putting it in 4th place for the top app software company stock searches behind Shopify (SHOP) and Uber (UBER).

Considering the humongous size of those two companies, that says something about Digital Turbine.

But let’s take a step back and look at what the company does before digging into its financials and valuation.

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Digital Turbine’s Business

As we mentioned, Digital Turbine is a mobile advertising company that connects advertisers with users through different avenues.

For example, advertisers pay them to pre-install their apps on phones. That money is then split with the carrier.

They also make it easier for companies like TikTok to take users from advertising pop-ups to downloads. Plus, they work with browsers and other points of connection on mobile devices to create ad campaigns that integrate app downloads.

Now your first thought is probably that Apple’s new privacy changes would hurt the company.

Here’s the thing. The core ‘preinstall’ business is only done on Android devices. In fact, most of Digital Turbine’s prospects are tied to the Android operating system.

To expand their reach, Digital Turbine recently Appreciate, Fyber, and AdColony.

Each company fits into its goal to become an end-to-end mobile advertising platform.

Financials

Just a few short years ago, Digital Turbine hadn’t even broken $100 million in annual revenues.

Today, they’re on track to exceed $1 billion in the next year.

The company’s average 3-year growth came in as follows:

• Revenues +116.91%
• Free cash flow (operating cash less capital expenditures) + 392.62%
• EBIT +739.17%

Those numbers are incredible.

What’s more, the forward revenue growth is expected to hit 127.11%, free cash flow of 105.54%, and 3-5 year EPS of 37.5% each year.

We do want to note that the company added $345 million in long-term debt to fund the acquisitions noted earlier. However, that’s why their net sales soared in June of 2021.

Valuation

As we mentioned earlier, we liked the valuation for Digital Turbine relative to its peers.

On the whole, Digital Turbine doesn’t look cheap on a price to earnings ratio basis or price to cash flow.

However, the PEG Non-Gaap forward is incredibly cheap, and we think it is a better reflection of the company’s financials.

Plus, APPS trades at just 17.61x forward cash, which is cheap when you consider the potential growth looking out 3-5 years.

The ability for Digital Turbine to add sales at more than 100% even after its acquisitions is outstanding.

Combined with the company’s focus on profitability, this is what we believe makes this story.

Our Opinion – 9/10

Digital Turbine is one of the few growth companies out there that can really dig in and deliver cash to its shareholders.

How many companies do you know with this kind of revenue growth that operate profitably? Not many.

Shares can whip around quite a bit. So you can use dips to add to a position.