digital turbine (NASDAQ: APPS) provides a platform for the growth and monetization of the mobile ecosystem. They connect advertisers, publishers, operators and device manufacturers with a complete ad stack and proprietary technology. The company generates revenue from two primary businesses: ODS/On-Device Solutions and AGP/Application Growth Platform.
ODS is a one-stop shop for pre-installed apps and curated content on new devices. ODS partners with operators and manufacturers to provide apps to users and earn revenue through installs and engagement.
AGP bridges the gap between app developers and brands/agencies. It provides a platform for targeted mobile campaigns across APPS’s extensive app inventory, enabling developers to reach relevant audiences and enabling APPS to earn revenue by facilitating those connections.
Stock performance is highly volatile. After going public in 2006 at $2, it has experienced extreme highs and lows, including reaching an all-time high By 2021, APPS will be worth more than $85. Since then, APPS has lost over 90% of its value and currently trades at around $3.80.
I begin my coverage with a neutral rating. My model 1-year price target is $4.79, which projects a 22% upside from the current price of $3.9. However, despite the expected upside, the lack of visibility into 2024 due to uncertainty about the ad spend environment and partnership prospects makes the stock an extremely risky investment right now, in my opinion.
Due to the many potential risks, investing in APPS requires careful consideration. While fundamentals are strong today, it has been facing modest pressure due to multiple recent headwinds, including lower advertising demand and the loss of partnerships, which could threaten future prospects.
Additionally, through early 2024, APPS expects continued adverse effects from declining U.S. device sales:
In our revenue guidance, we expect headwinds related to lower device sales, primarily to U.S. carriers, to continue into the fourth quarter. While we believe device trends should improve going forward, we saw an acceleration of declines early in the March quarter and currently have limited visibility into the performance of recent Samsung flagship device releases, leading us to further lower our ODS sales expectations.
Source: Third-quarter earnings call.
Revenue growth already experienced a double-digit deceleration last year. While it’s understandable that the headwinds may be temporary, in my view the magnitude of the decline highlights APPS’s relatively low resilience as a business and its slow response to address underperformance.
For example, during its third-quarter earnings call, APPS not only experienced lower ad demand and partner attrition, but also experienced operational issues that should have been a more manageable risk factor. This was brought up during the earnings call:
Hey Bill, I just wanted to follow up on your comment about why the SingleTap trial isn’t live. You talked about administrative issues. Can you give us more information as you hope this issue is resolved? Then I did some follow-up.
Source: Third-quarter earnings call.
Meanwhile, debt-to-equity remains high at 0.8x in 2023, almost 8x higher than two years ago, as APPS entered into a $600 million debt financing agreement sometime in 2021 amid a rising interest rate environment. times.
Rising debt levels may continue to threaten APPS’s future cash position. The most common use of cash is to pay down debt. In the third quarter, cash levels fell from $79 million to $49 million, which is more than a quarter of debt issuance at the end of 2021.
While APPS has a strong track record of positive cash flow from operations/OCF and FCF, overall cash generation has been quite inconsistent. Additionally, I believe that slowing revenue growth creates uncertainty about APPS’s cash flow outlook for fiscal 2024.
Part of my concern stems from what appears to be a persistent pattern of weakness in business partnerships. Revenue growth in its ODS/On Device Solutions and AGP/Apps Growth Platform businesses was primarily driven by partnerships with third parties such as telecom operators or brand agencies.
In Q3 2024, we saw APPS terminate partnerships with an EU reseller and an operator, resulting in a total revenue loss of over $8 million. Without these terminations, APPS’ revenue would have declined only 7%, rather than more than 12%.
Given that the same thing happened about a year ago when APPS filed for its 10K in March 2023, this appears to be a pattern that investors may want to pay attention to. At that time, annual revenue was down more than $80 million year over year, $77 million of which was due to the termination of carrier partnerships. Without this, APPS’s annual revenue would have been flat year over year, rather than down 16%.
So what appears to be a pattern of heavy reliance on a few, concentrated partnerships to drive revenue growth, and then a weakening of the relationships themselves, should raise a red flag for investors.
There are some catalysts in 2024, but their impact is likely to be minimal in my opinion. First, although APPS has signed partnerships with alternative app stores such as South Korea’s ONE Store, the impact may be limited. The ONE Store’s revenue is higher than Apple’s App Store in South Korea, marking an attractive partnership that integrates APPS’s SingleTap product into its 40 million devices, opening up a new user base.
However, the strength of this catalyst is affected by factors such as the likely negligible market share of alternative operating systems such as Apple’s iOS in South Korea, while Android is used by homegrown Samsung as a major player. Therefore, while ONE Store is promising, its initial contribution to APPS growth may be smaller than expected and will require further development to have a more material impact.
On the other hand, ad spending may bottom out in 2023, driven by the 2024 Olympics and US elections, which could mean there is an opportunity for a rebound in 2024. The improved outlook should benefit APPS’s AGS unit, potentially boosting not only revenue growth but also margin expansion.
AGP’s gross profit margin exceeds 77%, making it a higher-margin business despite accounting for just over 34% of total revenue. Meanwhile, ODS’s gross profit margin was slightly above 36%. With limited visibility into the ODS business in 2024, I expect the rebound, if any, to be driven by AGP. In this scenario, I expect AGP’s revenue share to increase from 34% a year ago to over 40% at the end of 2022, thereby improving overall gross margin.
My price target for APPS is driven by the following assumptions for the bull and bear case scenarios projected through fiscal year 2025 (the fiscal year ending March 2025):
Bull Case Scenario (40% Probability) Assumption – APPS will achieve the upper end of its fiscal 2024 revenue forecast of $553 million. I also expect APPS to achieve 8.5% revenue growth in fiscal 2025, reaching $600 million in annual revenue. I assign APPS a P/E ratio of 1.1x to reflect the valuation premium for successful execution of accelerated revenue growth, an expansion from the current 0.6x.
Bear Scenario (60% Probability) Assumption – APPS will achieve revenue of $547 million in FY2024 and $550 million in FY2025. I expect APPS to face partnership and cash flow challenges. In this case, I’d assign APPS a P/E ratio of 0.6x, which is where it trades today.
Integrating all of the above information into my model, I arrive at a weighted fiscal 2025 price target of $4.79 per share, which suggests 22% upside from current price levels.
In my opinion, APPS remains a relatively high-risk investment. While the upside looks attractive, I maintain a Neutral rating on the stock and recommend investors continue to watch how 2024 catalysts shape up before making a decision.
Despite its huge potential, volatility has defined APPS’s history, with the stock plunging more than 90% from its all-time high. While my model projects 22% upside potential to $4.79 in one year, uncertainty about the ad spend environment and partnership outlook clouds the 2024 outlook. Given the lack of clarity and high-risk nature of the investment, I’m initiating a Neutral rating. This means that while there is potential, the current risks outweigh the projected returns, making APPS not an ideal choice for investors right now.