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Can Digital Turbine Recover?

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Digital Turbine (NASDAQ:APPS) has been facing challenges in the digital ad and device market, leading to a lack of growth in their long-term drivers like SingleTap. Despite these setbacks, there are some positive developments that investors should consider.

The good

  • US RPD growth: Revenue per device in the US has been steadily increasing, signaling potential opportunities for the company.
  • Sequential revenue growth: The first quarter of FY24 showed some sequential growth, indicating that the worst might be behind us.
  • Strong pipeline of new carrier and OEM partnerships: Digital Turbine has a robust pipeline of potential partnerships that can offset any macro weakness.
  • Google partnership: The company announced a partnership with Google that has the potential to drive further growth.
  • OpEx constant in dollar terms despite investment in growth: Despite investing in growth initiatives, the company has managed to keep operating expenses relatively constant in dollar terms.
  • Acquisition integration completed: Digital Turbine successfully completed the integration of its acquisitions, positioning the company for future growth.
  • Cash flow and debt reduction: The company continues to generate cash flow and uses it to reduce debt and invest in future growth.
  • Longer-term growth strategy comes into focus: Digital Turbine has a clear growth strategy focused on three main planks: DT Hub, alternative app distribution, and SingleTap.
  • Inherent operating leverage if growth returns: If growth returns, the company has the potential to benefit from inherent operating leverage.
  • Barrier to entry: The company’s embedded base of hundreds of millions of devices is difficult to replicate, making it an attractive proposition for advertisers, publishers, and demand side platforms.
  • Investments will drop off at yearend: The company expects its investments to decrease at the end of the year, allowing returns to start emerging in the next year.

One notable aspect is the increasing revenue per device (RPD) in the US, which has been driven by a growing product portfolio and the strategic placement of their software on hundreds of millions of mobile phones. Additionally, the company sees opportunities to improve RPD for international markets.

Competitive advantage

Digital Turbine’s software stack and agreements with carriers and OEMs provide the company with a competitive advantage. This allows them to influence what users see on the home screen of mobile phones and produce data advantages for more precise targeting and higher ROI for advertisers.

Growth strategy

The company’s growth strategy is focused on three main planks: DT Hub, alternative app distribution, and SingleTap.

SingleTap

SingleTap technology enables single-click app installation, bypassing app stores, and increasing returns on advertising due to higher conversions. The company has seen momentum with SingleTap licensing and partnerships with top gaming and social media companies. SingleTap’s revenue streams are diverse, with licensing the technology being the most important and high-margin avenue.

DT Hub

DT Hub is an alternative app distribution product launched by Digital Turbine in partnership with four US operators. The company believes it is well-positioned to offer app-store solutions and expects higher RPDs for these stores.

In-App advertising and purchasing

Despite not producing material results yet, in-app advertising and purchasing have the potential to drive future growth. Digital Turbine plans to leverage its in-app advertising assets as an additional revenue stream.

The bad

While there are positive developments, there are also challenges that Digital Turbine faces.

  • Revenue is still contracting: The company is experiencing a decline in revenue, which can be attributed to softness in the ad and device market.
  • No new OEM or carrier agreements yet: Digital Turbine has not announced any significant new partnerships in the OEM or carrier space.
  • Soft device market: The soft device market has contributed to the company’s revenue decline.
  • Loss of TMUS content business and some AdColony revenue: The loss of T-Mobile as a client in their content media business and some AdColony revenue has negatively impacted the company’s revenue.
  • Rising interest cost: Digital Turbine is facing rising interest costs, which can impact its financials.

Finances and valuation

While growth has not yet returned, Digital Turbine has shown some signs of improvement. Sequentially, the company experienced revenue growth in the first quarter of FY24, and gross margin recovered slightly. The company continues to generate cash flow, reducing debt and investing in future growth.

Valuation-wise, with a market cap of $530M and an enterprise value (EV) of $880M, the stock is trading at low multiples. The company’s strong competitive advantages, potential growth initiatives, and the ability to generate cash flow make it an attractive investment option.

Conclusion

While Digital Turbine has faced challenges, the company’s competitive advantages, growth initiatives, and potential for cash flow generation make it an intriguing investment option. The recovery might take time, but with the potential for long-term growth drivers to deliver, the stock could experience significant valuation expansion in the future.

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