Digital Turbine is a growth company that is facing some short-term headwinds but could potentially turn out to be a long-term winner. When examining Digital Turbine, there are several aspects to appreciate, but also some concerns that are somewhat worrisome. In this analysis, I will investigate whether the risk/reward of investing in Digital Turbine is worth it.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly describe the company and if it has a moat. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Digital Turbine. If you would like to copy my portfolio or view the stocks in my portfolio, you can find instructions on how to do so here. I don't own shares in any of their direct competitors either. As always, I will keep this analysis unbiased. If you want want to purchase shares or fractional shares in Digital Turbine, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
Digital Turbine was founded in 1998 in Texas, United States. It describes itself as a leading, independent mobile growth platform that elevates the landscape for advertisers, publishers, carriers, and device original equipment manufacturers. Digital Turbine is primarily known for their product, Ignite, which collaborates with carriers such as Verizon and original equipment manufacturers like Samsung to pre-install advertiser apps on mobile devices. Ignite is installed on more than 800 million devices worldwide, including all Samsung devices. Ignite is a great product, but the problem was that revenue was only generated once per device. Digital Turbine has made acquisitions to become a more comprehensive platform and has developed technologies such as their patented SingleTap technology. This technology enables users to download apps directly from the browser, bypassing the need to go to Google Play. These advancements are expected to increase Digital Turbine's recurring revenue from digital advertisements in the future. Digital Turbine generates revenue by receiving a fixed amount for each device on which Ignite is installed. Additionally, Digital Turbine shares advertising revenue with their partners based on a predetermined agreement. In a previous call, their management described their future business as the Shopify of apps. While Digital Turbine has patented their SingleTap technology, I still don't believe that the company has a moat. However, they may develop one in the future.
Their CEO is Bill Stone. He joined Digital Turbine in September 2012 and became the CEO in 2014. Prior to joining Digital Turbine, Bill Stone served as Senior Vice President of Qualcomm and has also held executive positions at companies like Verizon and Vodafone. This means he has over 30 years of experience in telecommunications, mobile applications, content, technology, marketing, and distribution. He holds both a BA and an MBA from Rice University. Bill Stone has been described as a leader who isn't afraid to part ways with products or ideas if they do not align with his plans, a commendable quality in a leader. While it is difficult to find extensive information about Bill Stone, reviews from Glassdoor indicate that employees are satisfied working at Digital Turbine, suggesting a positive working culture, often influenced by the CEO. Furthermore, his active efforts in expanding Digital Turbine's business through acquisitions are noteworthy. However, it is important to note that the stocks have experienced significant volatility under Bill Stone's leadership. Although this isn't uncommon for a growth company, the stock price has fluctuated wildly since the pandemic, ranging from above $80 to below $2. Despite this volatility, I will give Bill Stone the benefit of the doubt due to his extensive experience in the sector.
I believe that Digital Turbine does not currently have a moat, but it is something they can potentially develop in the future. I will give management the benefit of the doubt due to their vast experience in the sector. Let's now analyze the financials to evaluate if Digital Turbine meets our criteria for a strong competitive advantage. For further clarification on the financial metrics, please refer to "MY STRATEGY" on the website.
The first number I will investigate is the return on invested capital, also known as ROIC. Ideally, you would like to see a return on invested capital (ROIC) above 10% in all years. As Digital Turbine is a growth company, it is not surprising to see volatile numbers in the past, and it shouldn't be concerning. It is nice to see that Digital Turbine has delivered a positive return on invested capital (ROIC) in the last four years prior to fiscal year 2024, but it is very concerning to see that ROIC decreased significantly in fiscal year 2024, where Digital Turbine delivered its first negative ROIC since 2019, and the second lowest in the past decade. When looking at the numbers, it is obvious that Digital Turbine benefited from the shopping frenzy following the pandemic and, as macroeconomic headwinds increased, it affected Digital Turbine negatively. Hopefully, Digital Turbine will return to a positive ROIC once macroeconomic conditions improve, but these numbers are concerning.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. As with the ROIC, these numbers are highly volatile and have been fluctuating significantly. Digital Turbine managed to increase its equity every year since 2018, but that streak ended in 2024, which saw equity decrease by more than 60%. This is concerning, but it is also worth noting that equity in 2024 was still at its third-highest level over the past decade.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Like other financial metrics for Digital Turbine, free cash flow varies significantly. It is encouraging that Digital Turbine has achieved a positive free cash flow in the past five years. However, it is concerning that free cash flow significantly decreased in fiscal year 2024. Management has mentioned it was partly due to delays in invoicing timing in the fourth quarter of fiscal year 2024, which affected free cash flow by more than $15 million. Thus, if Digital Turbine didn't have these invoicing delays, free cash flow would have been around $20 million, which makes it better but still the lowest free cash flow the company has delivered since 2019. Management has mentioned that they expect to deliver a positive free cash flow in fiscal 2025 as well, and hopefully, we see an increase. Levered free cash flow margin was also affected by the low free cash flow and the delay in invoicing timing. Thus, I don't want to give the numbers too much attention. The free cash flow yield is still higher than most years despite the low free cash flow in fiscal 2024. It indicates that Digital Turbine is trading at a favorable valuation, but we will revisit that later in the analysis.
Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has manageable debt that can be repaid within a 3-year period. This can be assessed by calculating the ratio of long-term debt to earnings. Digital Turbine had negative earnings in fiscal year 2024, which means that we cannot make the calculations based on earnings for that fiscal year. However, if we make the calculations based on EPS from fiscal 2023, which had an EPS of $0,16, it shows that Digital Turbine has a debt-to-earnings ratio of 23,50 years, significantly exceeding the recommended limit of 3 years. It should be noted that the high debt is a result of acquisitions, and management is committed to paying off the debt. Furthermore, long-term debt has decreased year over year for the past three years. Nonetheless, the debt is too high and would make me uncomfortable if I were to invest in Digital Turbine.
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Like every other investment, there are risks associated with investing in Digital Turbine. One risk is macroeconomics. CEO Bill Stone has discussed how the macro environment has been the most dynamic he has witnessed in his 30-year career. He mentioned that the macro environment has resulted in a slowdown in digital ad spending. Furthermore, there has also been a slowdown in U.S. device volumes, as consumers have decided not to spend money on new devices. Some U.S. operators have publicly reported that postpaid upgrade rates were much lower than usual and implied that there is now more than an eight-year upgrade cycle for devices. This means there are fewer new devices that will have Digital Turbine's products installed. Management believes that these numbers are unsustainable and that consumers will eventually upgrade their devices earlier than every eight years, but it is the current reality nonetheless. Exacerbating this trend were fewer software updates on the in-life devices, which reduced monetization opportunities for Digital Turbine. Relying on a limited number of customers. A significant portion of Digital Turbine's revenue is currently derived from a limited number of wireless carriers and customers. If any of these carriers or customers were to terminate their agreement with Digital Turbine or were unable to fulfill their payment obligations, Digital Turbine's financial condition and results of operations would suffer. Digital Turbine's contracts with advertiser and publisher customers generally do not include long-term obligations requiring them to purchase Digital Turbine's services and can be canceled upon short or no notice and without penalty. Historically, Digital Turbine's carrier and OEM agreements have had terms of one or two years with automatic renewal provisions upon expiration of the initial term. There are various reasons why customers might terminate their contracts with Digital Turbine, some of which are outside of Digital Turbine's control. For instance, one of Digital Turbine's largest customers is US Cellular, which generates Digital Turbine's highest revenue per device of any partner. US Cellular is about to be acquired by T-Mobile, which could mean that this customer is lost for Digital Turbine as T-Mobile works with one of Digital Turbine's competitors. Another risk is debt. Digital Turbine's significantly high debt will impact the return on invested capital in the future. High debt is a significant concern. In his book "Rule #1 Investing," Phil Town discusses the impact of debt: "A business that is carrying a lot of debt relative to its income has an unpredictable financial future. If there are any problems with the economy, a business with a lot of loans might be in big trouble." Debt is a major factor and burden on this company. Digital Turbine has managed to pay off some debt over the past three years, but the payoff decreased in the fiscal year 2024 as Digital Turbine delivered a lower free cash flow, allowing them to pay off less debt. Interest expenses have also increased as interest rates have risen, which means that Digital Turbine is paying off a larger share of its revenue in interest expenses. Even if management prioritizes paying off debt, Digital Turbine will have high debt for many years to come.
There are also reasons to invest in Digital Turbine. One of them is the company's growing device footprint. Management has mentioned that they anticipate an incremental 70-plus million devices launching with various Ignite capabilities. One reason for this anticipation is Digital Turbine's expanding relationship with Motorola, which is both exclusive to Digital Turbine and global, including all operators in the United States. Motorola has been shipping between 40 million to 50 million devices over the past few years and is one of the few OEMs showing positive growth. Management has also mentioned that Digital Turbine's pipeline remains extremely robust as they are seeing many global operators and OEMs wanting to work with them. They have indicated that more device supply opportunities will be shared in the future. Additionally, management has mentioned receiving recent encouraging reports from chipset suppliers on future device volumes, which tend to be lead indicators for future demand. This suggests that device sales may increase soon, benefiting Digital Turbine. Expanding product portfolio. Digital Turbine is enhancing its product offerings for On-Device Solutions (ODS) and AdTech Growth Platform (AGP) to drive growth. They've consolidated their ad tech assets into the Digital Turbine Exchange (DTX), combining capabilities from their Fyber and AdColony acquisitions. This positions them uniquely in the mobile advertising market, targeting brand advertising dollars instead of performance-based ads. Early results are promising, with a 15% increase in brand revenues from the previous year. Over a third of their revenue on the DT Exchange comes from SDK Bidding, a process where advertisers bid in real-time to display their ads in mobile apps through Software Development Kits (SDKs). This method is preferred by many brands and agencies, attracting both direct brand revenues and omni DSPs like The Trade Desk and Google DV360. They are also enhancing AI and machine learning in their DSP, DT Direct, to optimize ad bidding and grow market share. A Demand-Side Platform (DSP) is a system that allows advertisers to purchase digital advertising inventory in an automated way. SingleTap is expanding its reach, exploring alternative app distribution on various platforms, and better utilizing first-party data to drive advertiser outcomes and revenue. Overall, Digital Turbine leverages technological consolidations and innovative products to strengthen its market position and drive growth. Media relationship. Management has mentioned that media relationships are a growth driver for the company. Digital Turbine continues to expand directly with brands such as Apple, Amazon, Starbucks, P&G, and many others, as well as their advertising agencies, driving 15%+ annual growth. Furthermore, GroupM, the largest media buying agency in the world under the WPP umbrella, has included Digital Turbine as the only global preferred partner for mobile. Management has mentioned that the collaboration with GroupM expands Digital Turbine's addressable market for ad dollars, as GroupM manages over $50 billion of media buying, and Digital Turbine's competition in mobile will not have access to this brand inventory. Management expects that the GroupM relationship will unlock media dollars from well-known brands. This is important because most game publishers would much rather see a P&G ad or a Coca-Cola ad than an ad for a competing game trying to take their users.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,16, which is from fiscal year 2023, as EPS was negative in fiscal year 2024. I have selected a projected future EPS growth rate of 9%. Finbox expects EPS to grow by 9,3% in the next five years. Additionally, I have selected a projected future P/E ratio of 18, which is double the growth rate. This decision is based on Digital Turbine's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $1,69. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Digital Turbine at a price of $0,85 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 29, and capital expenditures were 24. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 17 in our calculations. The tax provision was 15. We have 102,119 outstanding shares. Hence, the calculation will be as follows: (29 – 17 + 15) / 102,119 x 10 = $2,45 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Digital Turbine's free cash flow per share at $0,05 and a growth rate of 9%, if you want to recoup your investment in 8 years, the Payback Time price is $0,60.
Digital Turbine is an interesting company, especially if management can execute its strategies over the next couple of years. Fiscal 2024 was an annus horribilis for Digital Turbine, where both ROIC and Free Cash Flow decreased significantly. In fact, ROIC was negative for the first time since 2019. Digital Turbine is facing some headwinds due to macroeconomic factors, which means that consumers are not buying new devices, with the latest data showing a more than eight-year upgrade cycle for devices. However, macroeconomics should improve at some point and hopefully, Digital Turbine can take advantage of it. Digital Turbine relies on a limited number of customers and only has short-term contracts with these customers, which means they could switch to one of its competitors, while outside factors such as acquisitions could also affect Digital Turbine. Digital Turbine also has a huge amount of debt, and if investing in Digital Turbine, one has to monitor whether management pays off the debt. Another thing I don't like about Digital Turbine but didn't mention in the analysis is that Digital Turbine is diluting shares. When Digital Turbine made their IPO in 2014, the number of outstanding shares was 36,383, and by the end of fiscal year 2024, it is 102,119, a 177% increase! Digital Turbine expects device growth through new partnerships and an improvement in macroeconomics, and once these happen, it should benefit Digital Turbine. Digital Turbine is also expanding its product portfolio, which should lead to growth and market share gains. Finally, Digital Turbine's collaboration with GroupM will benefit Digital Turbine as it expands the addressable market for ad dollars, and because Digital Turbine's competition in mobile will not have access to this market. All things considered, I'm not interested in investing in Digital Turbine at this time, as there are too many uncertainties, and I think there are better opportunities in the market.
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