Is This Cloud Stock Set for a Major Breakout?

If you were to draw a Venn diagram of mobile computing and digital advertising, Digital Turbine (NASDAQ:APPS) would fit squarely in the middle.

The company specializes in delivering relevant content to smartphones, which benefits from the ever-growing consumption of mobile content and precision targeted advertising.

It’s sometimes hard to figure out precisely what Digital Turbine does but in essence it supports app installation directly on devices and partners with major carriers and OEMs. With about three quarters of the world’s population now owning a smartphone, the market size is obviously massive.

The value proposition the firm offers is to both simplify user experiences and boost app developer visibility, which combined creates a win-win on the mobile arena.

As advertisers continue to seek out more ways to reach consumers, the platform from Digital Turbine is an obvious choice because it helps them reach consumers in a less intrusive way. For example, the platform bypasses app stores and makes a direct-to-device app installation possible that can noticeably boost user engagement.

Big Partners Key to Growth

Digital Turbine’s business model is not straightforward but that’s one of the reasons it commands a premium valuation. 

It has figured out how to partner with top telecom carriers and smartphone manufacturers ranging from Samsung to AT&T.

The deals result in all-important and wide-reaching distribution because its technology is embedded onto devices directly at the point of setup. That fact alone creates a high hurdle for competitors, or in the words of Warren Buffett, a moat.

Beyond partnership distribution, Digital Turbine has been acquisitive, snapping up Mobile Posse and AdColony. The former is a specialist in content delivery while the latter is good at advertising. They also complement the existing solution with data analytics capabilities that are foundational to targeted advertising.

Financials Paint a Different Picture

In spite of the strength of the business model and competitive advantages, Digital Turbine has once again reported disappointing financial numbers and offered weak predictions.

In its fiscal third-quarter 2024 earnings report, the advertising technology business shared that it generated less revenue than last year for the three-month period.

For the quarter that wrapped up on December 31, 2023, management reported that net revenue fell by 12.1% from the prior year to $142.63 million. Losses from operations were $9.27 million as opposed to the previous year when earnings came in at $9.80 million.

The total losses of $14.06 million translated to $0.14 per share, and when, compared to last year’s quarter those figures disappointed after coming in then at $4.06 million and $0.04, respectively.

In Q2 of FY 2024, which finished on September 30, 2023, Digital Turbine saw net revenue decline by 18.1% compared to the same period last year.

Finally, Digital Turbine experienced a total loss of $161.48 million and a loss per share of $1.61, which is in contrast to last year’s period when there was a profit of $11.70 million and earnings per share were at $0.11.

Digital Turbine’s Growth Outlook

A key component to successful investing is identifying the growth levers that make or break a company. For Digital Turbine, one of those is the rate of device upgrades. When consumers switch from annual upgrades to doing so every couple of years that’s a problem for Digital Turbine. 

At a high level you can think about it as the flow of customers being slowed, no different than a shopkeeper experiencing few customers over the course of a week on average when deciding to shut their doors on more days or for more hours.

In spite of that challenge, the company expects revenue this year will land somewhere between $547 million and $553 million. Management anticipates that non-GAAP adjusted EBITDA will range from $90 million to $94 million and expects non-GAAP adjusted earnings per share to be in the vicinity of $0.50 to $0.54.

Will Digital Turbine Stock Go Up?

If analysts are correct in their consensus price target view, Digital Turbine stock has a massive 99.5% upside opportunity ahead. They collectively place fair value at $5.38 per share.

Notably, a discounted cash flow forecast analysis is more pessimistic, though still bullish, with 26% upside to fair value of $2.68 on the horizon.

Digital Turbine share price has gone down a lot, falling by close to 64% in the last half-year and more than 28% in one month. The company’s trailing-12-month gross profit margin was only at about 44.69%, which is 8.1% less than what other similar businesses usually make.

Forecasts for the last quarter of FY 2024 indicate that revenue might decline by 16% compared to last year, arriving in at $117.69 million while earnings per share will be around $0.08, which would mean a reduction of 41.2% from the year prior. Plus, over the previous four quarters, Digital Turbine missed the consensus revenue and EPS estimates in three, which is disappointing.

For the entire fiscal year that ended in March 2024, revenue and earnings per share are set to decrease by 17.4% and 56.3% on an annualized basis, with figures coming to $549.97 million for revenue and $0.50 for earnings per share.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.