Digital Turbine: Decline In All Areas, Stay Away (NASDAQ:APPS)

Investment Thesis

Digital Turbine (NASDAQ:APPS) is in a difficult situation, and I don’t see any signs of a turnaround. The company continues to decline in revenue, the margins are getting worse, interest payments are increasing, and in the most recent report, management offers no ideas or plans that could indicate a turnaround. The only positive aspect I found is that the debt is not as high anymore as it once was. Probably, the stock is already too cheap to short, so I would simply sell it.

Quick recap

Digital Turbine has plummeted sharply from its highs, and I have also had a wild ride here. Inspired by strong growth, relatively cheap valuations (based on the estimates at that time), and many bullish articles, I bought the stock in early 2022. Later in the year, my position was 50% down, and after more profound research, I sold. Around this time, I wrote my first article about the stock (“The Sell-Off Was Justified And I’m Not Convinced Anymore”). I even shorted the stock in the second half of 2022, which went way better than the long position. At that time, there was still a lot of bullish sentiment.

My second article from April 2023 was titled “Digital Turbine Seems To Be In A Vicious Cycle.” Today, it’s time for an update. Let’s see where the company stands right now. Might it be a turnaround story, or will it quietly disappear?

The past: Financial Progress & Trends

First, a short overview of revenues, expenses, and net income over a longer period. Revenue keeps declining, and costs are cut, too, but not at the same rate. Those two huge loss spikes in two of the three recent quarters were due to “Noncash Goodwill Impairment Charges” ($147M in Q2 2024 of its fiscal year and $189.5M in Q4).

These are non-cash expenses, so no cash was directly lost to it, but still, they have negative consequences. First, repeated impairment charges signal to the market poor acquisition decisions in the past (which are poor management decisions, by extension). Secondly, it reduces the assets on the balance sheet, potentially making future financing more difficult or expensive. There have been two substantial impairment charges, yet $534M remains on the balance sheet, so further impairment losses are possible. Even without those, the net income would have been negative, and overall, the chart above shows a declining trend in net income.

The margin development is also disappointing. Note that the EBIT margin excludes the cost of interest payments and ignores impairment charges. The EBIT margin indicates operating profitability and should increase over time, especially for asset-light tech companies. This would show greater efficiency and improved pricing power and cost control. But what we see is a long-lasting downward trend.

Debt is a major factor and burden on this company. As can be seen below, total liabilities and long-term debt came down from the highest levels reached in 2022. However, it should be noted that most of this development took place up to mid-2023 and has remained almost constant since then. The exact numbers can be found on the Balance sheet.

However, the net interest expense was much higher in the trailing twelve months ($30.5M) than in 2022 ($8.3M). TTM Revenues were $544M, which means the interest expense alone is eating away more than 5% of the revenue. Even worse, the trends are that revenue tends to get lower and interest expenses to rise.

To conclude, almost all the shown trends paint a grim picture: revenue, margins, interest payments, goodwill, and intangibles are also in decline.

The present: Valuation & current developments

The company is currently valued at an enterprise value of $577M, its market cap is $218B, and its net debt (debt minus cash) is about $359M. A fair valuation is difficult to determine, as the company has repeatedly had unprofitable quarters. Discounted cashflow methods are not applicable either. If the forward-looking P/E estimate is correct, the valuation would be cheap, especially considering that the PS ratio is only 0.4. However, the forward-looking P/E estimate is based on the analysts’ figures, which were regularly far too high.

Note also that these are non-GAAP figures. In my previous articles on the company, I have pointed out the massive discrepancy between non-GAAP and GAAP figures. On the valuation page of Seeking Alpha, we see that the forward PE ratio from the chart above is roughly in line with the non-GAAP numbers given there. The column of GAAP numbers is empty, i.e., there is no P/E ratio here because there is no profit in GAAP measures.

Since I had included a screenshot of the earnings estimates in my April 2023 article, we can look at the extent of the downward correction because it demonstrates the lesson to learn that earnings estimates are just that – estimates. The first screenshot below is from April 2023, with estimates for the fiscal years 2023, 2024, and 2025.

Below are the numbers currently listed. Compare 2025: massive declines in both EPS and sales. Companies can look cheap, only to realize later that they were never cheap, but instead, the estimates were way off.

Estimating the future is like chasing shadows in the dark – challenging, uncertain, but it keeps us moving forward.

Unknown wise person

On the surface, the share looks cheap, but on closer inspection, it becomes apparent that the reality was not as good as the estimates in the past. Moreover, these are non-GAAP EPS figures that do not include stock-based compensation, for example. If you factor in all the other aspects, such as falling sales, deteriorating margins, debt, etc., I think we should be cautious and skeptical about these estimates.

I have been observing the share for at least two years and have already gone long and short here, and I’m not exaggerating: the estimates have always been too optimistic.

The future: Outlook

This may all have sounded pretty negative so far, but as we all know, the stock market trades the future. Are there any signs that the tide could turn, and the share could become a turnaround story? The last investor presentation is from June 2023, so I am using the previous quarterly and annual report as source.

Unfortunately, not much is revealed in practical terms. The report highlights new partnerships that are expected to “add more than 70 million new devices worldwide”. Besides that, the statement of the CEO contains a lot of very general statements, like:

We are increasingly convinced that we are on the right track with our overarching corporate strategy, and consequently, we are seeing signs of greater market demand for our unique product offerings that we expect will promote top-line growth, enhanced operating leverage and improved free cash flow generation for the Company in future periods. Bill Stone, CEO

In this difficult situation (the stock is down about 95% from its highs), the company should avoid generalizations and instead state clear, measurable facts and plans, at least in my opinion. As an investor, I would expect this. How exactly do they plan to achieve the turnaround? They could construct an easy-to-follow Investor presentation with the newest ideas. The report gives a revenue and non-GAAP adjusted EBITDA estimate for the fiscal year 2025.

considering the ongoing uncertainties in the macro environment, the Company currently expects the following for fiscal year 2025:Revenue of between $540 million and $560 million. Non-GAAP adjusted EBITDA² of between $85 million and $95 million. It is not reasonably practicable to provide a business outlook for GAAP net income because the Company cannot reasonably estimate the changes in stock-based compensation expense, which is directly impacted by changes in the Company’s stock price, or other items that are difficult to predict with precision. Business Outlook

Share dilution, insider trades & SBCs

These three things are standard checks I make in every article, as excessive stock dilution and stock-based compensation can disadvantage shareholders. In addition, insider trades sometimes contain valuable information about management’s confidence.

According to openinsider.com, there were no insider trades over the last six months. Shares outstanding continue to rise slowly but steadily, and SBCs more than doubled compared to 2022 despite the negative business development. I don’t want to criticize this too much because the SBCs per employee are not well within the range of the industry standard. Of course, the company needs to offer reasonable compensation to keep talented people. However, it is still a factor to pay attention to for investors.

Conclusion

I think this analysis speaks for itself in terms of what I think of the share and what I recommend. The simplest summary is this checklist below, which I include in every article; all points here must be answered negatively.

Click to enlarge