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Digital Turbine’s Free Cash Flow Could Power a Huge Gain in APPS Stock

InvestorPlace - Stock Market News, Stock Advice & Trading Tips APPS stock could be worth about 37% more at over $86, if Digital Turbine's acquisit...

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InvestorPlace - Stock Market News, Stock Advice & Trading Tips

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Digital Turbine (NASDAQ:APPS), which makes money from mobile ad spending, has had a rough summer. APPS stock fell from a peak close of $94.74 on Mar. 1 to a low close of $47.90 on Aug. 19. That’s a drop of almost 50% over six months.

APPS stock: A digital illustration of software icons surrounding a cellphone.
Source: Shutterstock

Now, however, it seems the stock has fallen too far. APPS currently looks like good value. In fact, I think there is good reason to believe it could move significantly higher.

Here’s what you should know about APPS stock moving forward.

APPS Stock: Where Things Stand

This company earns money from targeting ads to both advertisers and publishers with its two new acquisitions this year, AdColony and Fyber. It gets paid on a variety of click-through rates (cost per click and cost per mile) on mobile phones and tablets with a limited number of clients and carriers. So, as general economic growth climbs and as mobile engagement increases, APPS makes more money.

Digital Turbine reported excellent results on Aug. 9 for its fiscal first quarter. And this did not even include the Fyber acquisition for the whole period.

Nevertheless, on a pro forma basis (as if it held the acquisitions the whole period), revenue grew 104% year-over-year (YOY). In fact, the company says that its profits were “driven by accelerating organic revenue growth and scaling operating leverage.”

But even more importantly, the company was free cash flow (FCF) positive during the quarter. It produced FCF of $14.29 million during the quarter. This represented about 6.7% of the $212.6 million in revenue the company made during Q1.

Analysts forecast revenue of $1.19 billion this year and $1.57 billion next year. Assuming it can make 8% of revenue (from the contribution of the full acquisitions) in free cash flow next year, that means Digital Turbine can produce FCF of $125 million by 2022.

What Digital Turbine Is Worth

We can use this FCF estimate to value Digital Turbine stock. For example, at a 1% FCF yield, the stock is worth $12.5 billion (i.e., $125 million / 0.01). To be a bit more conservative, using a 1.5% FCF yield, APPS stock is worth $8.33 billion.

That is substantially higher than today’s market capitalization of $6.09 billion, or about 36.78% higher. That puts the value of AAPS stock at $86.80, or 36.78% over its price as of this writing of $63.46 per share (Sept. 7).

Keep in mind, though, that I suspect that the actual FCF margin could be substantially higher as the full contribution from its acquisitions come into play next year. For example, in its latest slide deck (Page 27), the company shows what the full revenue profile would have been.

For the period, Digital’s existing revenue would have been $95.1 million, about 37% of the total $256.3 million in pro forma revenue (remember, APPS reported just $212.6 million). The AdColony acquisition, closed in late April, would have made $58.3 million. Likewise, the Fyber acquisition, which closed in late May, would have brought in $102.9 million in sales.

These full contributions could have easily raised Digital Turbine’s FCF to 10%. We should be able to see this in the next quarterly earnings release. And if that higher result is the case? APPS stock could be worth even more.

What to Do with APPS Stock

So far this year, APPS stock is up just 12.3%. However, from its latest trough close of $47.90 on Aug. 19 (after the recent earnings release), the stock is up nearly 33%.

Don’t let that bother you. As I have shown, this stock could easily rise another 37% to $86.80. Plus, it could rise even more if Digital Turbine’s FCF margins come in higher than expected. As such, now might be an ideal time to take a toe-hold stake, with a view to averaging down in case the stock falls.

On the date of publication, Mark R. Hake did not hold any positions (either directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

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