There is nothing more that the market hates in this environment than businesses that are losing money. However, we believe that they are overlooking an opportunity in these types of businesses. In today’s FA Alpha, discover Digital Turbine’s true potential and the reason behind why it was added to our FA Alpha Screen.
FA Alpha Daily:
Tuesday Company Specific
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The market may hate technology and advertising right now, and it is not wrong.
High inflation is a huge problem. It makes people and businesses cut costs wherever possible. Advertisement is one of those areas.
However, the fact is cash is still king. High-return businesses will win out no matter what sector of the economy they are in.
What the market really hates is not specific industries. It is instead a “hockey stick” business that cannot turn a profit. Coined in the PE industry, hockey stick growth is the expectation of rapid growth after a period of stagnation.
The problem with these companies is not solely based on inflation, but on raising interest rates as well. Without cheaper money to fund investment, it may be impossible to turn a profit and eventually see the curve of the hockey stick.
Digital Turbine (APPS) appears to be a company that is stuck in the ‘first half’ of the hockey stick. In fact, in the current environment, it would appear that returns have fallen in 2022, proving the critics right.
As a mobile advertising platform, a company like Digital Turbine needs to reach a critical mass of corporate users to accelerate the SaaS model. Without demand, it’s stuck as a floundering firm.
However, Digital Turbine has an amazing business with off-the-chart profitability – if you are looking at the right numbers.
Digital Turbine actually has huge profitability and incredible financial metrics. Uniform return on assets jumped from 82% in 2020 to an astonishing 368% in 2022 as the company finally has found the value it is looking for.
Rather than being stuck looking for the hockey stick growth, it turns out that Digital Turbine has already seen it.
Furthermore, Digital Turbine is only trading at a 14x Uniform P/E, showing that the market does not understand what they are doing.
The booming demand, high growth potential, impressive returns, and a low Uniform P/E meant that Digital Turbine rose to the top to become an FA Alpha name.
Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.
Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”
Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.
The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.
The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.
That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.
This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.
See for yourself below.
To see the other 49 names on the list, click here.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
Today’s highlight, Digital Turbine, Inc. (APPS) is one of the top stock picks from FA Alpha 50 this month. To see more stock picks like this, become an FA Alpha and get access to FA Alpha 50.