**A note: I didn’t proof read this article before posting because APPS is down a lot today, and I want to allow you all to get a lower entry. You’re welcome subscribers.
Digital Turbine (APPS): A Repeat Write Up
This write up will probably be a bit shorter than normal because I’ve already written about APPS once before. I’ll provide a link to the original article from nearly a year ago to explain the business! Personally, I would simply read the explanation and the details with the Mobile Posse acquisition. The financials are all outdated. Link can be found here: Original Post
Irrational Markets Provide Opportunity
The market right now is a weird place. I have not written for some time because there are simply not many deals for a value investor out there. I don’t want to waste my readers time. I will write once there is an opportunity to be had! For this reason, I would subscribe if you’re not because it’s been since over five months since my last post. Email subscribers (100% free but warning WordPress is a pain to sign up) get an email notifying I’ve posted and can be notified with only the great potential investment ideas!
So what awakes me from my slumber in this overpriced market?
Digital Turbine (APPS) has dropped over 30% in one month. What does Buffett say in times like these?
However, I’ve been saying this since the high 60’s…
Why Buy Now?
This is the million dollar question are all. If you read the original post, you would remember that Digital Turbine has a network of partners of telecom carriers and original equipment manufacturers (OEMs). They essentially created a digital distribution network for their software products.
For an analogy, think about warehouse distribution. Once you build a warehouse you can continue to ship more and more products through this warehouse. However, once you reach the warehouse capacity, you need to build more. This is expensive, and it takes a lot of time.
Digital Turbine, through their partners, built a digital distribution network to get products onto smartphones (Smart TVs are coming next). Since their network is digital though, they don’t need to build more warehouses or infrastructure. This super light capital model can reach billions of people, with very little extra cost. This model works if you can continue to add products to go through the network right??
Hence why I am writing today. Here are the announcements for three acquisitions:
- Digital Turbine Announces Definitive Purchase Agreement to Acquire AdColony
- Digital Turbine Announces Acquisition of Triapodi Ltd. (d/b/a Appreciate), a Programmatic Demand Side Platform (“DSP”) Company
- Digital Turbine Announces Definitive Purchase Agreement to Acquire Fyber N.V
All these acquisitions have happened within the past two months, but there hasn’t been a single earnings report since these acquisitions have been announced. In fact, the stock in this limbo period with no guidance and has dropped over 30% with no relevant news.
The BIG Picture
Fyber is basically an in-app platform, for app developers, to help apps monetize their product. AdColony is the same thing and they have managed to get advertising on iOS devices. The third acquisition is a essentially a bidding platform. They developed technology to allow real-time bidding for ad placement.
In essence, Digital Turbine bought two platforms with over 1 billion users and a company which specializes in getting more dollars for each ad in a seamless fashion. In addition, Digital Turbine has already created a technology, SingleTap, which allows one user tap to take care of all the steps of a transaction in a single tap. This will allow AdColony or Fyber ads to be seamlessly downloaded by users, while getting more money through each ad. Digital Turbine may even install these monetization platforms on their media source, Mobile Posse, that AT&T and Verizon are installing on devices later in the year.
The point is this… these were good acquisitions. They added to the platform, vertically integrated the company, and added a metric crap load of revenue!!!
Anyone can create a thesis for a company though. What can’t always be justified is the valuation. Here, that’s sorely mistaken. Here’s a summary of the revenue from the three combined companies:
|Company||2020 Revenue ($millions)||2021 Guided Revenue ($millions)||Growth|
|Digital Turbine||$250||(my estimate) > $400||60%|
To summarize all this in one easy statement:
They achieved this number very efficiently. I think $1 billion in revenue is a veryyyyyy conservative number. That doesn’t guide for any growth from AdColony, no synergistic revenue, and a very low estimate on the core business, with no rollout of Mobile Posse throughout the year.
Now, here’s the tricky part. I have no idea what the combined profits from AdColony or Fyber will actually be. I know that neither are bleeding cash though. I think both will achieve profitability with Digital Turbine’s help and their expected growth. With this information, we can use a price to sales indicator.
Current Valuation = $5.5 Billion, ~$6 Billion after the dilution required to acquire Fyber.
Forward Sales = $1 Billion, minimum
Forward Price/Sales Valuation = ~6 times Price/Sales
For those that have no idea, the Trade Desk, that has around $900 million in revenue, is currently at a a 39 times Price/Sales and a $25 Billion valuation. That number is after they’ve dropped 50% in the last few months. There is a massive gap in those valuations, especially when Digital Turbine will soon have comparable metrics.
In summary, you have a company that is about to be massive and growing very fast, at a cheap price. If the company was awarded the valuation of the Trade Desk, a very similar company, you could expect nearly a 600% increase in a year and a half.
Conservatively, I’ll just say that it will double and that it will trade at around 12 times price to sales *wink wink*, instead of the 39 times price/sales that others are getting.
I consider myself a value investor. I look to buy a quality business and pay less for the value that I am receiving. The current volatility has provided that opportunity. The next earnings report is in the first week of June. After that, the secret will be out for what this company might become. The next earnings report will be in early August. With the Fyber deal closing in early June, it might be too late by the end of the summer.
You should subscribe so I can make you money!!!;)
Also, here’s another resource if you want to read more. This writer doesn’t do as much digging as I do… but this is the one that has got the closest so far.
**We are long on APPS. All readers should do their own research. This is not investment advice. It is for entertainment purposes only. No one’s paying me to pump this stock. Yatta yatta yatta, insert legal jargon here.
Here’s a business & investment analysis over Roku’s underappreciated flywheel!
Here’s an article over a unique hyper growth company with massive tailwinds at a reasonable valuation!
An interesting question was asked to me on Twitter that inspired this piece, and I’ve been itching to write about another company. This article will go into what drives share price using an interesting case study, Domino’s Pizza. Following this research, I will draw similarities to another company I believe will have outstanding returns, Xpel […]