Digital Turbine, Inc. (APPS)

$APPS a couple of percent down in pre-market, like other Adtech stocks, following the sharp selloff by Snapchat. I couldn't avoid the news that SNAP results were impacted by Apple IDFA and "global supply chain issues and labor shortages impacting our partners".

Remember that this is a very expensive company, trading at a forecast PE ratio of 210, unprofitable to date, so is "priced for perfection" one might say. I've read the Snapchat earnings transcript including Q and A. It's worth a read if you have time. They state that the majority of the revenue miss is attributable to the changes in iOS rather than the global supply issues that got a dual spot in the headlines. In particular they make it clear that they see the Apple ecosystem change impacts as transitory but likely to impact for several quarters. You can read more detail from the SNAP earnings call about the specific issues faced from the iOS changes (and it is well worth a read) but the issue largely seems to be summed up in the following, which I took straight from the call transcript "advertisers have essentially for a long time now use a set of really sophisticated tool to measure and optimize their campaigns. So that allows them to test out a bunch of different creative and see what's performing more effectively, so on and so forth. And the big change there was that with these new Apple changes, those tools were essentially rendered blind and in their place Apple released a new product called SKAdNetwork that allows advertisers to measure across different advertising platforms, but without a lot of the flexibility that they're used to. So for example, you can only really measure your advertising results using the success parameters that Apple has already defined."

At this point, you might wonder why $APPS is down in pre-market, given that Digital Turbine almost entirely generates its revenues through Android (very little comes through iOS, though some does now as a result of the acquisitions). The word 'Android' does not feature once in the Snap results transcript, but it would seem plausible to me that the iOS issues for ad campaign sponsors could well be a benefit for Digital Turbine as some advertisers are presumably going to divert more budgets through Android where they have better insight into the campaign efficacy.

Of course, the market won't react like this as nobody reads earnings reports or transcripts these days. We'll just have to wait and see, not long to wait now. I am away next week so updates may be limited.

Have a great weekend all.

Apple will pay for being stingy

What's the difference between the iOS and Android ecosystems?
The two product families differ in many ways. While all components of Apple’s iOS ecosystem are firmly under the company’s control, the Android ecosystem is more fragmented. The Android operating system is open-source, which allows a variety of manufacturers to adapt it for their own devices.

Seems to me their are a couple positives for APPS from the Facebook call. They didn't mention headwinds from ceos not committing ad dollars due to supply chain ssues affecting their ability to satisfy demand. This was part of explanation for SNAP's miss. And Sheryl Sandberg called out Apple for limiting access to users info not as a means to protect their privacy, but as a means to benefit Apples own advertising business. This second positive gives advertisers a second reason to shift dollars to Android phones. (Apple is creating an unfair playing field. They will be able to sell customer data they have collected that others can no longer collect. (Such as your profile when you purchase the phone, what you download, and what you buy as you use the phone.))

I wanted to write something in response to the Seeking Alpha article that's been discussed here, and in particular the Beneish M-score.

First, on the article generally. The headline of 'likely an earnings manipulator' is very defamatory, and even as somebody who is happy to read bear and bull thesis on my holdings, I found this article headline a step too far, not least because they are calling them a 'likely earnings manipulator' predominately due to their analysis of the Beneish M-score. I've been investing for quite a long time and this is a ratio I've rarely heard spoken about. Without going into the details of what it is, you could very quickly reassure yourself by simply comparing the current $APPS Beneish M-score with that of their score for the last few years. The data I have shows a latest score of -1.37, and prior years of -1.6, -1.8, and -2.6. The SA article says that anything below -1.78 is good. Given that they quote the current M-score to be 0.48, (I can't see where they got this from) in a 10-year range that spans -2.7 to (plus) 976, with a median value of -2.7, I'm beginning to wonder the relevance of this score altogether..

I don't know how reliable the 0.48 figure is, as the fiscal year 21 figure of -1.37 is all I can see.

I then wondered about other companies, so here are some other companies with their last 3 years M-scores (most recent to least): TTD -2.3, -1.7, -1.5 (manipulator), AMD -0.8 (manipulator), -1.9, -0.7 (back to manipulating), MSFT -2.3, -2.4, -2.3, Zoom -0.2 (manipulator), -1.9, -1.4 (back to manipulating again...)

In fact, various companies have higher (worse) M-scores than Digital Turbine at the time of writing: NVDA, AMD, Pubmatic, Netflix... the list goes on.

They do go on to try to further justify their position that it is likely manipulating earnings, but I don't see any credibility to this at all. They refer to receivables, gross profit margin, sales growth, asset quality, and leverage. I already know that sales growth, profit margin and asset turnover ratios are good or consistent. I think some of the remainder of the article is confused by the fact that we are part way through the financial settling of the acquisitions, so you have (for example) figures on the balance sheet from Q1 that are representing payments which will become due in later quarters, but are present as early as Q1, when only partial revenue is recognised from those new acquisitions - that will have a temporary effect on the balance sheet and various ratios. They make exactly this mistake with accruals too, ignoring the effect of the timing of the acquisitions, even quoting "its income statement differs significantly from the timing of its cash flows, which suggests earnings manipulation".. by apparently analysing this further they conclude a $15m difference between their EBIT and net income.. $15m seriously.. ?? I honestly can't wait to see what they make of the balance sheet this quarter when we settle a $100m payment to AdColony yet see that this can't be matched to anything other than Goodwill..

Honestly, if it wasn't for the seriousness of the accusation, this article is a total joke and scores zero credibility in my book.

Seeing a lot of angry posts about the Seeking Alpha article accusing APPS of manipulation. I think it's important not to get emotional in the face of criticism and to be objective in your analysis. While I'm bullish on APPS, I want to know the the reasons why someone would be bearish. We're all here to make money after all. So let's analyze what the article is about. You can easily do the calculation for the Beneish M-Score yourself as Prof. Beneish put it online: https://apps.kelley.iu.edu/Beneish/MScore/MScoreInput

It looks like that the Beneish M-Score algorithm requires you to compare inputs from a given year and the prior year in order to determine the score. The Seeking Alpha article does not indicate which years the author used as inputs to determine the M-Score. So I tried to determine this from the inputs he mentioned and it appears he is all over the place. For example, in the accruals section, he used operating cash flow from the last 12 months, but he used operating income from fiscal year ending in March 31, 2021. These errors indicate to me that the author's analysis based on M-Score is inaccurate to say the least.

In addition, I have serious doubts about using the M-Score to detect earnings manipulation when APPS has just completed two acquisitions that almost tripled the size of the company. My understanding is that M-Score is useful to detect manipulation because it takes into account, among other things, whether a company is aggressively including accounts receivables as sales to account for rising operating costs and falling gross margin. In the case of APPS, sales, operating costs, and gross margin were all skewed due to the recent acquisitions. If you want to rely on M-Score, then I feel like you're going to have to wait at least a year. If you do it now, you're essentially comparing the financials of three companies to the financials of APPS alone.

Anyway, sorry about the long post. I hope you find it useful.

A lot of comments below about the strength and 'resilience' of the stock. APPS is a merely a proxy of Digital Turbine's revenue and earnings growth. They're rare, but some stocks do go from Small Cap to Large Cap, and it's always a result of excellent management exploiting fortuitous circumstance and timing. Besselar showed Carnegie 'steel' and Carnegie recognized it as the coming future. So he leveraged his fortune to corner the market eventually selling Carnegie Steel to the U.S. Govt. for $350M..........in 1901. Stone and company have put Digital Turbine smack dab in the way of a coming Tsunami of 5G-driven cell-phone e-commerce. It's the future. I can't explain the collapse to $48. But what we're seeing now is APPS moving up to meet the news not of last Q's results imo, but of what's coming next Q and in 2022. In the coming weeks APPS is going to cross up and over into triple-digits. And you'll never see it in double-digits again..........unless they split the stock.