Friday, June 4, 2021

2021 Strategy Series - My Biggest Position and Highest Conviction Company For 2021 - Digital Turbine (APPS)

A lot has changed since my last article on Digital Turbine (aka APPS) - Although just a few days away, but APPS has become my biggest position and become my highest conviction company probably for 2021 right now. 

This will also be my 4th article on APPS this year.

For this article, I will be writing on a 20 pointers that you must know about APPS. Some of the pointers may be repetitive but it is repeated because it is important.

Here we go...

The Company

1. Digital Turbine (aka APPS) is an estimated US$6bn listed entity in Nasdaq. With the acquisition of Fyber last week, along with AdColony and Appreciate recently, it has transformed into a full stack end-to-end ad tech platform.

2. APPS used to be solely focused on Android products only. But with these acquisitions, it has gotten into the IOS space. There is also the opportunity of cross-selling.

3. Even without these acquisitions, APPS on-device solutions are amazing. Basically, one of their products – ignite – is the product that root your android devices with initial rooted apps. They seem to have absolute monopoly in this space. Any form of competitor will be their customers (like Facebook) to partner directly with OEM or Telco operators to place their application into the phone upon the startup. As per the words of the CEO, “…So when our software goes on a device, whether that's a Samsung device, whether that's a Verizon device, we have a moat around that. And so we, in concert with those partners, decided what goes on the device. We're not competing with 10 other players to decide what goes on, we decide that. And so that competitive moat that is there is really strategic important to what we're trying to accomplish…”

4. Another of their services, prior to the current acquisitions, SingleTaps (which APPS have patent of) – Earn US$1m a week. Prior to Jul 2020, it took 3 months to earn US$1m.

5. Their strategy revolves around the network effects with their growing ecosystem - More partners, more devices embedded with their platforms and more advertisers. Last reported, APPS has over 600m devices with their products.

6. With the development of 5G, people will eventually require to change their phones. Meaning APPS current and adding onto 40+ relationships with OEM and Telco operators will come in very handy to bring the new “5G” phones into their ecosystem.

The Numbers

7. For the fiscal year 2021, APPS reported $316.6 million in revenue, growing 126% as reported and 64% growth on a pro forma basis, generated $75.6 million in adjusted EBITDA, an increase of 287% over the prior year and delivered $71.5 million adjusted net income or $0.74 per share, as compared to $0.20 per share in the prior year.

8. Guidance for next quarter is revenue to grow to between $188 million and $192 million, expected adjusted EBITDA to grow to between $32 million and $34 million. At $188million, it is already more than half of the revenue in FY2021. In addition, full year revenue for FY2022 has a high probability of rising to $1bn.

9. Right now, the market cap is only around US$6bn. Thus, the forward looking 1 year FY2021 PS ratio is only 6 times. As comparing to one of the biggest ad-tech out there, The Trade Desk has a PS ratio is 30 times with over $895m revenue.

10. On the other hand, IronSource is a competitor stated in the Needham Interview by the CEO. It is getting listed through a SPAC deal at US$11.1bn. That is almost twice the current market cap of APPS, while projecting a revenue of only US$455m in FY2021 and US$622m in FY2022.

In the latest transcript, the CEO stated:

11. “…we’re on track to launch with both AT&T and Verizon later this year with some of our content product offerings…”

12. “…seeing approximately 30% of new devices sold with our larger carrier partners being 5G...”

13. “…begin to execute on their plan to address the $300 billion market opportunity…”

14. “Digital Turbine doesn’t have any material input costs. Our cost of sales is just our revenue shares with our partners. And our people costs are nominal, given we do more than million dollars of revenue per employee…”

15. “…we’re really continuing to focus on not just smartphones but other things -- other device  types in terms of tablets and televisions and other device types as well to expand the market opportunity…”

16. “…The first one is, is that, as we do newer agreements, they tend to have more favorable terms in the earlier agreements and as the mix begins to shift and become more and more sorts of new versus old that that benefits us…”

17. “...the second factor is, it allow these devices to get recycled and put out into the open market, so they don’t necessarily have a carrier tied to them anymore. That -- as that base gets bigger and bigger that also helps us create margins over time for us as well…”

Risk

18. Share dilution – Fyber will receive $400 million worth of Digital Turbine stock based upon the 30 day VWAP before the close of the deal. 

19. Increased competition – Since the advertising industry is not capital intensive, there will be no barrier of entry if one could think of a “good” adtech idea. This can be seemed from the numerous advertising companies getting newly listed in the US market.

20. A potentially stressed balance sheet – with 3 acquisitions completed within 2 to 3 months, APPS balance sheet will be stretched in the next quarter. Current Ratio has been below 1 in the latest financials. APPS also increased their revolving line of credit from $100 million to $400 million with an accordion feature enabling upsizing the facility to $475 million. It has currently have drawn $237 million on this revolving line.

Conclusion

Prior to concluding, the mitigation to the risk are that (1) dilution is around 10%. But this dilution will not significantly increase the PS ratios and it is probably at around the current share price. (2) Even with the increasing competition, APPS has a service (Ignite) that has no competition at this point in time. (3) APPS is profitable and cash-flow positive. Furthermore APPS do not has material cost and the only cost of goods are the profit sharing with their partners. Thus, if they maintain their positive cashflow, APPS will be able to move forward easily despite having a “stressed” balance sheet. 

Since the risks are mitigated, the main issue remains that if their partners turn on them, they may potentially loss out a huge group of potential revenue/customers. 

Nevertheless, the positives outweighs the main issue, as APPS remains an asset-light, low capex, innovative, having significant growth within a growing TAM industry, being profitable and having positive cash-flow company.

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