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Digital Turbine: Don't Give Up, Here's Why

Jan. 05, 2022 9:00 AM ETDigital Turbine, Inc. (APPS)82 Comments


  • Digital Turbine is a free cash flow story.
  • This business requires hardly any capex. Practically all of its EBITDA gets converted to free cash flows.
  • Please note management's guide for its EBITDA to grow by 10x over the next 3 to 5 years.
  • The stock is priced at 33x this year's free cash flows.
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Article first published on Deep Value Returns.

Investment Thesis

Digital Turbine (NASDAQ:APPS) has made meaningful acquisitions that have obfuscated its results. The key takeaway here has a lot less to do with its topline growth, and

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This article was written by

Michael Wiggins De Oliveira is an energy specialist whose primary focus is capitalizing on “the Great Energy Transition” - the confluence of decarbonization, digitalization with AI, and deglobalization - to achieve greater investment returns. Through his 9+ years analyzing countless companies, Michael has accumulated outstanding professional experience in the energy sector and a following of over 40K on Seeking Alpha.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of APPS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (82)

Manzanita Research profile picture
@Michael Wiggins De Oliveira I've enjoyed your article here and Youtube discussion about $APPS. I decided to buy some AH at 43. However one thing that concerns me which you can possibly help me understand is -- why did APPS drop significantly in spite of beating earnings the past 2 quarters? Q22021 -6.82% , Q32021 -19.01%. Why was the market disappointed in spite of $APPS beating both EPS and Revenue targets? Most importantly has whatever was disappointing analysts been resolved? It seems odd if guidance was the problem since the stock dropped for both of the past 2 quarters even with beats?
@Manzanita Research IMO, the company doesn't do the greatest job of explaining to investors exactly what it is that they do. It's also a relatively small player that only 2 years ago pre-COVID was a $7.00 stock which later in the year went parabolic. It's been volatile ever since. I think there's been some concern that they wouldn't be able to integrate the acquisitions and was priced for perfection, but mostly it's an issue of flying under the radar along with the need for some price consolidation. Another poster a while back said the situation reminds them of how TTD was 3-4 years ago.
@Manzanita Research
The big problem is the reduction in gross margin in the last 2 quarters that is why it dropped like a rock… the market sees the revenue increase but the loss in the margin was the big problem…they can make all the revenues they want but those revenues have to be profitable! I am not saying they are not however considering that there is not enough cushion for any other gross margin reductions as this will turn this investment into a complete flop…
Management did discuss about future gross margins north of 30 % but market so far in these two quarters sees reduction in gross margin and talk…need to get it up…as the market fears knows this is a bad and volatile period for advertisers in general and really dont know how long it will last so apps is like a binary bet… if it keeps or increase its gross margins then it will fly to the moon.. if it keeps growing of course.
Anymore reduction and really is gonna be a really bad investment…
That said risk reward is a good bet and probably this advertising thing will blow over once the situation with the supply chains… also this is not accounting for any positive developments from synergies… also if apps just kees margin stable is also a good investment…
@randominvestor I believe this was due to some of the products offered by the acquired companies being lower margin and thus distorting the overall direction of the company.

Can't remember, but it seems like there may have also been some issues in regards to how margins are calculated that would have understated them. Need to go do some digging on that one.
Entry Point here? Reasonable PT end 2022?
High Sharpe profile picture
I am buying a bit here.
@High Sharpe if youre a long term investor i think under 50 seems like good entry
@Miwicz Under $50 has been my nibbling point as well.
@clrodrick there are 3 somewhat recent insider buys around $50
could be making another move soon
GARPdude profile picture
@john boy To the downside? It's currently in a bear flag pattern. If $50 doesn't hold, we could see $45 or $42 in the next few trading days.
@GARPdude It is all depends on NASDAQ direction, APPS just follows NASDQ.
@danirak generally yes. Could see huge break from the index around earnings
It would seem better to play both AAPS & IS until the market chooses which is
best. Good luck!!
This company has 10+ bagger potential over the next 3-5 years. Loading up here and riding it out, longs will be rewarded on this one.
Since the author mentioned IronSource, I'd like to compare IS with APPS.
They have similar organic revenue growth, around 60%.

IS gross margin 83%, APPS 34%.
IS EV/Sales (TTM) 13.6, APPS 8.5
IS Opration cashflow(TTM) 141M, APPS 41M
IS Operation cashflow margin 28%, APPS 6%
IS Balance sheet, net cash 753M, APPS minus180M
APPS has greater execution and integration risk, due to the aggressive M&A strategy.
IS is more than 60% more expensive, but with better margin, cash flow, and balance sheet.

I am long IS, not saying APPS is not good, just prefer quality over value.
Out_on_a_limb profile picture
@John W in IT, you are not comparing the same margins or sales (cf. the article), etc. If you compare the 2 graphs over 6 months, IS is weaker.

IS is not the same kind of business, it is less diversified in terms of software as it is essentially a games platform. The virus is still around, but I am not sure people will play as much as now in the future. How many games can one play?
@Out_on_a_limb Before the pandemic, game-industry reveneue was growing by about 10 to 15% annually. During the pandemic, it has been growing at a doubled rate, around 25%. So the pandemic was a tailwind, but even without it, gaming was a growing industry. IS was growing 50% before the pandemic, the last two years they were growing 80%, the latest quarter they start to slow down to 60%, but they can easily maintain 30% growth. The current market valuation is priced in the slow down and probably went too far.
idkmybffjill profile picture
@John W in IT iron source reports net revenue. APPS reports gross revenue. So your gross margin calculations are not comparable. I’m tired of beating this dead horse.
apps will hit $150 by December, easy to add and wait.
@brainleft 150 in your dreams lol
first you pump magnite, now you pump apps
@Mad Investor like magnite at these levels
Painful the last few months for any growth stock, but I'm willing to ride the storm. Thanks for this article, it makes me sleep better!
APPS quickly diving back down towards the buy level once again. This sucker is super volatile!
prior to covid it was 7 bucks. the market is going to drop them back down
GARPdude profile picture
@Finding Your Retirement Strong support at $45. It's not going anywhere near pre-covid levels. If it does, I will take a loan against my mortgage and pile in.
GULP Investment Group profile picture
@Finding Your Retirement Not even remotely the same company it was pre covid. Not going to explain why, but you should research.
@Finding Your Retirement some prices are based on real FCF and growth. This is one
Their reputation is what is preventing me from getting long (as well as their thin margins). Also their dependence on Google/Android, seems like that too much of a risk.
idkmybffjill profile picture
@FitBitBear they report revenue differently than other ad tech companies. If you took their net revenue number, which is how other ad tech companies report total revenue, their gross margins would be super high.
Why is 33X cash flow so cheap?
I have a good position on apps… the problem with apps is the shrinking margin… in fact decreasing the margin by 3-4 % will make this investment a bummer… lets hope margins will reverse… i was hoping the author would discuss this …
@randominvestor I would suggest rereading the article. The author did discuss it.

Hint: 3-4% doesn't matter much when when your potential revenue stream grows exponentially.
No he is not ! Show me where he is discussing why gross margins are dropping and what are the reasons that this will stop and reverse!!!
Furthermore you are completely off that 3-4 % margin dont make a difference !!! Their gross margin almost equals expenses !!! If GM drops further Apps is in the doghouse !!!
That is why the stock is so volatile!!! Growth will not cure a not profitable business !!! It can grow all it wants they have to fix margin is dangerously low !!!
Out_on_a_limb profile picture
@randominvestor, you sure love exclamation marks!!! But it doesn't make your points more relevant (you've not read the article). Most of the revenue was paid out to the telecoms and this ratio is going to decrease with the recent buyouts. What matters is the margin out of the contractual fees, and it will increase.
Yes the author said dont give up, I said if u give up then don't give in, if u give in then don't give up.
@victortan I've read your comment 3 times and it's still saying nothing.
Am I correct in understanding that their platform is only applicable
to Android devices?
If so, does that mean that IPhone users cannot be engaged by APPS?
If so, it seems we are giving up a lot of upside.
@stanley goodspeed No. But this deal only pertains to the Android ecosphere. They'll do business with anyone who will do business with them. The extent of their participation in the iOS ecosystem is up to Apple, not them.

But there are a couple of important points here. One is that they will get access to something like a billion Android devices outside of the US. The other is that becoming more important to Google's revenue stream means they're here to stay.

Even if they don't get any more business with Apple, the Android universe is large enough for this company to grow 20x plus from where they are today.
@usedcarguy thanks for the clarification
I bought, held, and traded covered calls and after one year the option premium and protective puts were my only reward. I would've done just as well if not better buying and holding voo. This stock is an F investment unless you know how to trade it with options or you tediously buy and sell shares on a timed basis. Stay away is my advice
@mbharrygray Or if it's a long term investment..
JeFawk profile picture
@mbharrygray Sounds like you missed a lot of opportunities to buy in the 40-55 range and to sell in the 70-100 range.
Do you buy your stocks and then never look at them for the next year?
APPS is a powerhouse in the making. I'm over 50% cash and waiting patiently for an additional opportunity to pounce.
what number is your opportunity?
@john boy I think adding below $55 is wise and will back up the truck below $50
jonescm128 profile picture
Great article. I initiated a position in early December and have been adding ever since. The pullback in tech has presented so many great buying opportunities - long APPS!
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