Ad-tech and original equipment manufacturer Digital Turbine Inc. (APPS) has demonstrated its business resiliency amid the COVID-19 pandemic. The company witnessed strong demand from app publishers and advertisers for its unique set of product offerings across the full range of the platform. In addition, its stocks surged 11% in premarket trading on December 28 after the company announced a multi-year deal with Alphabet Inc.’s (GOOGL) Google cloud platform to drive its product and growth strategy for Android.

However, its shares have declined 14% over the past three months. In addition, the stock is currently trading below its 50-day and 200-day momentum of $64.67 and $67.62, respectively, indicating a bearish sentiment.

APPS should grow significantly as demand for advertisement increases with the digital media boom. However, we are concerned about the stock’s financials and premium valuation.

Here’s what could shape APPS’ performance in the near term:

Inadequate Financials

APPS’ revenue increased 337.6% year-over-year to $310.21 million for the second quarter ended September 30, 2021. However, its operating expenses grew 399.6% from the year-ago value to $293.67 million. The company’s net loss came in at $5.85 million, compared to a net income of $373 thousand in the prior-year quarter. In addition, its net cash used in investing activities rose 846.9% year-over-year to $27.5 million.

APPS’ trailing-12-month gross profit margin of 34.2% is 30.8% lower than the industry average of 49.4%. Furthermore, its trailing-12-month cash from operations of $40.88 million is 65% lower compared to the industry average of $116.95 million.

Stretched Valuation

In terms of forward EV/EBIT, the stock is currently trading at 50.76x, 140.6% higher than the industry average of 21.10x. Also, its forward Price/Book of 11.6x is 91.6% higher than the industry average of 6.06x. Moreover, APPS’ forward Price/Cashflow of 144.15x is 515.9% higher than the industry average of 23.41x.

POWR Ratings Reflect Uncertainty

APPS has an overall D rating, equating to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. APPS has an F grade for Stability and a D for Value. The stock’s beta of 2.19 is consistent with the Stability grade. In addition, the company’s higher-than-industry valuation is in sync with the Value grade.

Of the 168 stocks in the F-rated Software – Application industry, APPS is ranked #133.

Beyond what I’ve stated above, you can view APPS ratings for Growth, Quality, Momentum, and Sentiment here.

Bottom Line

APPS’ increased loss in its last reported quarter has caused its share price to plunge over the past few months. Furthermore, the company’s stretched valuation multiples could threaten its future price performance. Thus, APPS is best avoided now.

How Does Digital Turbine Inc. (APPS) Stack Up Against its Peers?

While APPS has an overall D rating, one might want to consider its industry peers, Open Text Corporation (OTEX), Progress Software Corporation (PRGS), and Commvault Systems Inc. (CVLT), having an overall A (Strong Buy) rating.

APPS shares were trading at $60.76 per share on Monday afternoon, down $0.23 (-0.38%). Year-to-date, APPS has gained 7.43%, versus a 29.01% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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