Continued Strong Growth And Operating Leverage At Digital Turbine Point To A $12.80 Target Price

Summary

• Digital Turbine just reported a terrific quarter with 38% revenue growth and lots of operating leverage.
• Numerous growth catalysts are progressing on plan.
• Management guided conservatively for Q4 but we think they can beat their estimates.

Digital Turbine (NASDAQ:APPS) has had a great run since we wrote it up at $1.80 per share. While it may be tempting to take profits we think there is tremendous upside to the business and stock from these levels. First, to valuation. At $6.45 the company trades at an Enterprise Value to Revenue multiple of 3.1x our 2020 calendar year revenue number. While not dirt cheap, it is an attractive valuation for a company growing 30%+ per year and demonstrating terrific operating leverage. The stock even becomes cheap on a P/E basis if this growth continues into 2021 (and we think it will).

What catalysts support APPS revenue growth from here? First, increasing revenue per device ("RPD") at existing carriers. In the September quarter, RPD with APPS' top 4 carriers increased 30%. Basically in a flat smartphone market, Digital Turbine was able to engineer 30% revenue growth. Very impressive.

Second, growth from new products. New products represented 18% of overall revenue in the quarter and grew 30% sequentially. Bill Stone, CEO, stated that he was unhappy with the pace of new product growth and tweaked the organization to bring increased focus on this area. He also stated that APPS is already seeing some benefits from these changes. Products like Singletap and MediaHub are extremely promising and should fuel growth for the next few years.

Third, the company is deepening its relationship with Samsung. During the quarter Digital Turbine was in 50 countries with 10 (estimated) products with Samsung and that number is going to 70 countries with 20 products this quarter. Additionally, the win with Telefonica, enabled by the Samsung relationship, will start ramping in the December quarter.

International media represented 38% of revenue in the quarter showing year over year growth of 57%. These international players want exposure both internationally but also in the US market and Digital Turbine can deliver both to them.

Finally the company announced that they would be working with Verizon to install Disney+ on handsets in the holiday season. The company also stated that they were working directly with Disney on other new initiatives.

Where can the stock go from here? If you model two more years of 25% growth (quite plausible in my opinion) and continued operating leverage we think APPS can earn $0.45 in 2021 on $210 million in revenue. If you put a growth multiple of 5x on that revenue you arrive at a $12.80 stock price or roughly 100% upside from here.

Disclosure: I am/we are long APPS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.