Policy changes can’t stop the digital turbine (NASDAQ: APPS)


After an uneventful first semester, Digital Turbine, Inc. (NASDAQ: APPS) rallied, but once again failed to stay above the critical US $ 90 level. Still, it seems the strong growth was factored in as it quickly returned after the last profits. In this article, we’ll take a look at its current valuation.

See our latest review for Digital Turbine

Second quarter 2022 results

  • Returned: US $ 310.2 million (up 338% from 2Q 2021)
  • Net loss: US $ 5.85 million (down US $ 6.23 million from 2Q 2021 profit)

Although profits and cost control were weaker, the company reported a decent second quarter result with improved revenues. Over the past 3 years, on average, earnings per share have grown by 104% per year, but its stock price has increased by 246% per year, which means it is significantly ahead of the growth in profits.

While other companies in the ad technology industry have certainly suffered from Apple’s Advertiser Identifier (IDFA), this impact was only 1% of Digital Turbine’s consolidated revenue, speaking of the diversification and vigilance of the company.

In addition, the company is expanding its partnerships with OEMs, strengthening ties with AT&T, Verizon and Samsung. CEO Bill Stone reflected on the positive results and remained optimistic about the future, citing “a significantly expanded market opportunity anticipated for quarters and years to come.”

DCF valuation model

With the Discounted Cash Flow (DCF) model, we generally think of the value of a business as the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. For those passionate about equity analysis, the Simply Wall St analysis template here may be of interest to you.

Is the digital turbine reasonably valued?

We use what is called a two-step model, which means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. To begin with, we need to get cash flow estimates for the next ten years.

Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous Free Cash Flow (FCF) from the latest estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down sooner rather than later.

10-year free cash flow (FCF) forecast

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leverage FCF ($, Millions) US $ 181.6 million US $ 293.0 million US $ 436.9 million US $ 550.2 million US $ 653.2 million US $ 742.7 million US $ 818.3 million US $ 881.4 million US $ 934.2 million US $ 978.8 million
Source of growth rate estimate Analyst x1 Analyst x1 Analyst x1 Is 25.92% Est @ 18.73% East @ 13.7% Est @ 10.18% Est @ 7.71% Is 5.99% Est @ 4.78%
Present value (in millions of dollars) discounted at 6.4% $ 171 US $ 259 $ 363 $ 430 US $ 480 US $ 513 US $ 531 US $ 538 536 USD US $ 528

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 4.4 billion

After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount terminal cash flows to their present value at cost of equity of 6.4%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 979 million × (1 + 2.0%) ÷ (6.4% – 2.0%) = US $ 23 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 23 billion ÷ (1 + 6.4%)ten= US $ 12 billion

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is US $ 17 billion. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of US $ 70.5, the company seems potentially undervalued with a discount of over 50%.

This may sound worrisome, and we recommend that potential investors dig deeper. What is happening here that causes the market to undervalue the stock so much? Valuations are imprecise instruments, keep this in mind.

NasdaqCM: APPS Discounted Cash Flows November 8, 2021

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. DCF does not take into account the possible cyclicality of an industry or its future capital needs, so it does not give a complete picture of a company’s potential performance.

Since we view Digital Turbine as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or the weighted average cost of capital, WACC), which takes debt into account. We used 6.4% in this calculation, which is based on a leveraged beta of 1.004. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with a limit imposed between 0.8 and 2.0, a reasonable range for a stable company.

To move on :

Despite over 60% growth and solid guidance, Digital Turbine found no love after these profits, especially after they turned out to have the latest policy change effects under full control. From our perspective, it looks like the stock is being dragged down by general industry panic.

Yet the DCF model is not a perfect equity valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result.

For the digital turbine, there are three Additional aspects you should explore:

  1. Risks: Take risks, for example – Digital Turbine has 5 warning signs (and 1 which is a bit rude) we think you should be aware of.
  2. Future benefits: How does APPS ‘growth rate compare to that of its peers and the market in general? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
  3. Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock, search here.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.

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