Bag-holding Company 1: Digital Turbine (APPS)
Ok – I am starting a new series on the companies that I am Bag-holding. Every article is meant to be brief. With little mention of the fundamentals or valuation, I will concentrate on my justifications and the risks in the near term. This is because my average price will unquestionably be substantially higher than the share price at the moment. Thus, I'd prefer to instead concentrate on the qualitative characteristics of the company.
The first company that I am will be reviewing is Digital Turbine (APPS). I used to be super bullish on this company and has written numerous articles on it. Although I am bullish right now, it would benefit me more if I bought the firm now at its current share price rather than holding it at my average share price, since I believe it is definitely much more undervalued right now!
|Logo taken from Digital Turbine Website|
Reasons for HODL-ing
1. Single Tap Growth.
Management has spoken extensively about Single Tap, with partners like Samsung, Telefonica, Meta, being mention along the way. The management has stated that the upcoming quarter will have some revenue related to Single Tap growth, and the ramp up in revenue will come in the Dec quarter. Nevertheless, I am sure Single Tap is on every investors’ mind and execution remains key. If this f*** up, the share price will face another steep drop.
2. More than Ignite and Single Tap
Everyone thought APPS is only about Ignite and Single Tap. But they still have the Content Media segment with T-Mobile. Currently they are also now working with Verizon and AT&T on their postpaid customers. In their newly design website, they still have at least 5 other products. Now imagine this, if they can place all their products on their partners’ devices, that could significantly grow their revenue!
3. First Party Data
Data is key. They have the first-party data in view of their ignite platform. I have written about this here.
4. Advertising under Adcolony
This segment should be doing well. I have a friend whom is working as a Programmatic Adtech Manager with Azerion – a competitor of Adcolony - he mentioned that some clients prefer Adcolony due to the Single Tap integration. Nevertheless, Azerion financials grew significantly and I believe Adcolony will have similar trends.
5. Tailwinds in Dec Quarter
Dec quarter advertising, World Cup and Mid term elections - these are the various tailwinds in the near term. There was also an article in Seeking Alpha stating that there is a theme among consumer goods companies that many will ramp up advertising in the last quarter of 2022. The cause of the slowdown in advertising during the Sep quarter was supply chain problems, which businesses had anticipated and thus, reduced advertising spending. However, many businesses have scheduled more advertising in the final quarter of 2022 as they need to clear inventories. World Cup and Midterm Elections are additional events that may result in higher advertising pricing and ultimately the advertising side for APPS.
6. EBIT Positive
Everyone placed too little emphasis on APPS being EBIT positive plus FCF positive. I follow a list of 24 Adtechs and APPS has the 6th highest EBIT margin among the 24 companies including META and GOOG.
Near Term Risk
This was an issue in the past and will continue to be an issue for some investors in the future. Nevertheless, it is important to note that, in the last filing, APPS has made a payment of US$60m of the debt.
2. Slower Growth
The significant growth period has past as the growth from acquisitions has now been embedded in their financials. Upcoming comparison will not be tough.
3. Lower Devices Sales in Future
Many semi-conductor suppliers have reduced guidance for the upcoming quarters. It is very possible that Smartphone devices sales will be hit and the revenue from Ignite Platform will continue on a downtrend.
4. Advertising is Discretionary Expense
Advertising is expected to slowdown in view of recession. But I have also written an article that provides an alternative view on why Advertising should not be slowed down during a recession/inflationary period.
I am holding on to APPS for the long term and I remain confident of APPS having a 10x potential. This is even much more likely now since their share price has fallen off a cliff. However, if the share price ever rises to my breakeven share price (around 45) within a short period of time or before the beginning of 2023, I might sell half of my holding.
This is due to my own belief that a slowdown or recession may occur in 2023 but not in the final quarter in 2022. When the slowdown starts, I will probably have a chance to buy more.
Basically, I just want to average down my cost basis, and you can say, timing the market.
Interestingly, APPS has made a US$12m strategic investment into Aptiode announced on 5 Oct 2022! I had written a Tweet on it. But regardless, I believe APPS is just trying to bring in a new partner!
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Stay tuned for the next write up!
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