Shares of on-device media technology company Digital Turbine (NASDAQ:APPS) have been hammered amid the recent tech sector meltdown. Over the past week, APPS stock has shed nearly 40%. That’s a huge haircut in a short amount of time. And while APPS is up 16% on the day, it’s still down 21% over the past month.

And yet, nothing has changed about the Digital Turbine growth narrative, which has been and still is one of the most compelling growth narratives in the market.

After all, the last time we heard from management about the business was back in February when the company reported exceptionally strong third quarter numbers that included 146% revenue growth and 302% adjusted EBITDA growth.

The only thing that has changed surrounding APPS stock over the past few weeks is a sharp rise in the 10-Year Treasury yield. This is an ephemeral and overstated headwind. It will pass. When it does, APPS stock will soar 50%.

Here’s why:

APPS Stock: Overblown Rates Headwind

APPS stock has been hammered over the past few weeks because of fears related to a sharp rise in long-term bond yields. The basic thinking is that, as long-term yields rise, equity valuations will correct lower, because stocks and bonds are competing investment vehicles, so as bond yields rise, the required rate of return on stocks rises, too.

That thinking makes a ton of sense. And if yields were to rise forever, then I’d say growth stocks like APPS stock will keep plunging.

But yields aren’t going to rise forever. Instead, it looks like the 10-year Treasury yield will max out around 2% over the next few years.

Here’s the thinking.

Historically, the 10-year Treasury yield has very closely tracked the sum of the 3-Month Treasury yield (a proxy for inflation which the Fed controls with its target interest rate) plus real GDP growth. This relationship is unmistakably strong.

Importantly, the 10-year yield has historically never surpassed the 3-month yield plus real GDP growth unless during a time of significant economic contraction (and therefore, negative GDP growth).

The Fed has reiterated multiple times that they will not move on interest rates anytime soon. Thus, the 3-month Treasury yield will remain near-zero for the foreseeable future.

Real GDP growth is expected to jump to 4% this year in a sharp “bounce-back” year. But normalizing out for Covid-19 noise, real GDP growth in 2022 and after is expected to hover around 2%.

Thus, normalized, the 10-year yield should settle around 2% and remain there for most of 2022 and 2023. We are at 1.5% today. By my math, then, yields have another 50 basis points to go over the next 24-plus months. That’s a slow and steady grind higher.

To that end, I think we’re close to the end of the surge in long-term yields. Once the bond market calms down, I fully expect growth stocks like APPS stock to bounce back.

Still a Disruptive Hypergrowth Company

Despite the recent sell-off in APPS stock, Digital Turbine is still a disruptive hypergrowth company with tremendous long-term potential.

I like to the think of the company as pioneering a targeted advertising model for mobile app developers. Here’s what that means.

Digital Turbine has a core software platform, DT Ignite, which gets built into phones that are made by its partner OEMs (like Samsung) and/or deployed under its partner wireless carriers (like Verizon).

Before consumers ever open those phones, Digital Turbine’s Dynamic Installs software pre-installs apps onto the phones (called Native App Preloads). Once consumers open those phones, DT’s Set Up Wizard asks consumers if they want to install various different apps. Then, once consumers operate those phones, DT’s platform leverages user data to suggest and/or directly install apps related to the consumer’s interests.

It’s basically a targeted advertising platform, for apps, pre-installed onto phones.

This model might sound annoying. Who wants apps predownloaded on their phone? But, it’s also pure genius.

Traditionally, most of Digital Turbine’s revenues come from the Dynamic Installs business. This is an entirely pre-paid business. And while consumers might not like their phones coming packaged with pre-installed apps, the likes of Verizon, AT&T, Samsung and Lenovo aren’t going to stop doing it because it’s a highly lucrative business opportunity for them (if you’re an app maker, the hardest thing to do is get consumers to install your app, and you’d pay an arm and a leg for DT Ignite to conquer that hurdle for you).

At the same time, most people won’t delete the DT platform. For a variety of reasons. One, many consumers don’t want to take the time to uninstall the software. Two, they might not know how to do that. Three, they might actually enjoy the data-driven app recommendations, just like many people actually enjoy data-driven Facebook ads.

In this sense, Digital Turbine’s business model is a winning one.

Lots of Firepower in the Pipeline

When I first looked at the company about a year ago, Digital Turbine was an app advertising company. That is, the company was pulling in over 80% of its revenues from its Dynamic Installs business that programmatically installed apps on user phones.

But Digital Turbine has since undergone a breakthrough transformation.

This past quarter, Dynamic Installs comprised less than 50% of revenue. The other 50% came from the company’s various new technology and content products, such as SingleTap (which allows app developers to integrate single tap download functionality on phones).

Revenue from these products grew by more than 500% year-over-year in the third quarter.

In essence, Digital Turbine has transformed over the past year, from an app advertising company, to an app technology company, creating a suite of products and services to help app developers make, market, and distribute their apps.

This transformation is clearly working wonders, as evidenced by the six-fold increase in non-DI revenue this past quarter.

Ultimately, strong early signal on this breakthrough transformation creates a runway for APPS stock to head significantly higher, both over the next few months and next few years.

50% Upside Potential for Digital Turbine Stock

By my numbers, the recent sell-off offers dip buyers in APPS stock the chance to make 50% return in a hurry.

There are about 3.5 billion smartphone users on the planet Earth. Only 570 million of them have Digital Turbine software installed on them.

That’s 16% penetration.

There really is no reason that number can’t shoot up to 50% or higher over the next several years. App advertising is clearly a high value-add function, and Digital Turbine is the unrivaled leader in app advertising, with a large competitive advantage through powerful network effects. Plus, everyone at some point will have a smartphone, meaning that the number of smartphone users globally will trends towards 7 billion over time.

Net net, Digital Turbine has a clear runway from 570 million installed phones today, to 3-plus billion phones in the future.

Assuming the company does do that, my modeling suggests that Digital Turbine is on track to do over $2.5 billion in revenues by 2030, with profits of about $8 per share.

Based on a 25X forward earnings multiple, that implies a 2029 price target for APPS stock of $200. Discounted back by 8% per year, that implies a 2021 price target for APPS stock of over $100. That’s about 50% above where the APPS stock price sits today.

Bottom Line on APPS Stock

The recent tech sector meltdown is a golden buying opportunity. One of the best tech stocks to buy on the dip is APPS stock.

— Luke Lango

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Source: Investor Place