Digital Turbine: Buy, Hold, or Sell?

The ad-tech and original equipment manufacturer (OEM) Digital Turbine, Inc. (APPS) has demonstrated its business resiliency amid the COVID-19 pandemic, as evidenced by  its  747.6% gains over the past year. APPS has managed to remain profitable and generate positive cash flows at a time when advertisement spending declined by over 13% (as per GroupM 2020 projections).

With 2021 generally expected to be the year of recovery, APPS should grow significantly as  demand for advertisement increases, driven by the digital media boom. However, we are concerned that the stock’s sky-high valuation might lead to a price dip soon. Hence, we think it is advisable to wait for some time before betting on the stock.

Here is what we think  could shape the performance of APPS in 2021:

Increasing Market Reach

With major tech companies rolling out devices that are compatible with the coming 5G technology, the demand for new and improved software applications has risen. As such, many companies have been teaming with APPS to pre-install their software on  recently launched mobiles and other devices.

As one of the largest on-device media platforms, APPS maintains long-standing partnerships with more than  40 tech companies, the most popular among which are Apple, Samsung, Verizon, and AT&T. APPS maintains a global supply chain. with operations in some 190 countries worldwide .

APPS won the Company Culture and Technology and Innovation Award from  the Austin Chamber of Commerce in December last year, highlighting its fast-paced growth in the ad-tech space.

Unabated Growth

APPS essentially started out as a penny stock, with its stock price ranging from $1-2 for nearly a decade. The stock made a breakthrough in 2019, when it began partnering with the giants of the tech industry. APPS has gained 2677.2% over the past three years, backed by its impressive revenue growth. The company’s revenues have increased at a CAGR of 103.4% over the past three years, while its total assets have increased 22.4% over the same period. Its trailing 12-month gross profit has increased over 400% over the past three years.

Impressive Revenue and Earnings Outlook

Because the software industry is expected to remain one of the forerunners this year and beyond, and APPS is well-positioned to ride the growth, analysts expect the company’s EPS to rise 240% in the current quarter (ending March 31, 2021), 215% in fiscal 2021, and at a rate of 50% per annum over the next five years. The company’s revenue is expected to rise 89.7% in the current  quarter, and 102.3% in the current year.

High Volatility and Stretched Valuation

APPS stock quadrupled in value within three years to exceed $5 billion in market capitalization. Such impressive gains are often associated with substantial volatility, making the stock a highly speculative bet.

APPS has a beta of 2.4, which signifies  its high volatility. And while the company outperformed benchmark indices over the past couple of years, the  performance appears to be unsustainable. The stock has declined 20.2% over the past five days since hitting its 52-week high of $70.40 on January 25. Moreover, analysts expect a further dip in price soon; Indeed,  they expect the stock to decline 22.1% in the near future.

APPS stock’s decline over the past couple of days can also be attributed to its sky-high valuation. In terms of its non-GAAP trailing 12-month P/E, APPS is currently trading at 150.55x, 465.4% higher than the industry average of 26.63x.

POWR Ratings do not Indicate Sufficient Upside

APPS has an overall rating of C which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering  118 different factors. Our proprietary rating system evaluates each stock based on eight different categories. APPS’ Growth Grade of B is consistent with the company’s substantial earnings and revenue growth potential. However, the stock has a Value Grade of F, reflecting its relative overvaluation compared to other stocks in the Software – Application industry.

In addition to the POWR Ratings grades I have just highlighted, one can see APPS ratings for Stability, Sentiment, Momentum, Quality and Industry here.

Better than APPS: Click here to learn about top rated Software – Application stocks.

Bottom Line

APPS’ significant business growth has allowed the stock to deliver impressive returns so far this year. While analysts expect the company’s fundamentals to improve further in the near future, we think APPS is long overdue for a price correction. The stock’s sky-high valuation might lead to a price dip soon. Hence, it is advisable to wait for some time before betting on the stock.

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APPS shares were trading at $60.03 per share on Monday afternoon, up $2.82 (+4.93%). Year-to-date, APPS has gained 6.14%, versus a 0.80% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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