News Flash on APPS, DCPH, DAVA and KRNT
Digital Turbine (APPS) reported earnings this week and the headline was that revenue growth of 18.4% (to $36 million) missed by $1.7 million and that adjusted EPS of $0.05 was in line with expectations. Digging a little deeper we find that the company had a mediocre quarter because Android-based mobile sales were sluggish, largely owing to a lot of promotional efforts by iOS handsets in the quarter (resulting from Apple product launches). That wasn’t a huge surprise, and we’ve even talked before about how visibility on mobile handset growth is a little murky.
Shares were up the day before the report, then down the day after, then rallied 15% yesterday. How do we explain this action?
In short, the market isn’t always efficient in the short term. The harsh reality is that NOBODY knows what the real value of a stock is at any given time—even analysts. Their price targets are based on estimates of what could happen, and—this is not a joke—if they play with the numbers in a spreadsheet they can arrive at whatever price target they want to get to. Mix that in with a lot of people who don’t bother with spreadsheet-based valuations and you get stocks swinging all over the place when there’s lots of news, such as after a mixed earnings report like Digital Turbine just delivered.
What else did we learn? A lot. The company is making a significant acquisition, buying up Mobile Posse, a U.S.-based company that also operates a mobile content discovery and advertising platform with products that are both similar and complementary to Digital Turbine’s. The price is $66 million, paid for through cash and debt (no dilution to shareholders) and Mobile Posse is 100% subscription revenue and generates positive free cash flow. It is expected to generate around $55 million in revenue in 2019 so it’s a significant acquisition that should boost Digital Turbine’s annual revenue by roughly 40%, give or take.
It sounds like the two companies represent a good tie-up with cross-selling opportunities, plus the chance for Digital Turbine to take Mobile Posse’s products to the global market, where the company currently does no business. Additionally, management also indicated that carriers are likely to see some lift in demand and start to push Android handsets as they roll out 5G (AT&T, Sprint, Cricket, etc.), and the partnership with Samsung, which is just beginning to roll out 5G phones (before Apple), should also drive positive results as it’s still early in the process.
In short, there are a lot of moving pieces here. The core Digital Turbine company had a slightly disappointing quarter, but things appear to be improving, and the acquisition of Mobile Posse certainly adds an element of intrigue and upside potential (more scale, more growth opportunities, etc.) while new model releases from carriers and OEMs with Android are accelerating. There remains growth potential in devices beyond handsets too, including TV.
Taking it all in, there’s nothing concrete that will change Digital Turbine’s results in the immediate term. But for the rest of calendar year 2020 there’s certainly a lot to look forward to. I believe that’s what the market is realizing and is why the stock shot up yesterday.
Let’s continue to hold APPS and see how the stock performs. It’s trading near our original entry point right now. HOLD
We also have news from Deciphera Pharmaceuticals (DCPH), which just announced that the FDA accepted its marketing application for repretinib for advanced gastrointestinal stromal tumors (GIST), with an agency action date of August 13. That’s something of a disappointment—analysts had seen an earlier action date because of the seemingly clear data and Fast Track status. Still, Deciphera management has indicated a 2020 launch is in the cards given the August date. Concurrently, Deciphera has launched a $250 million public offering, with a 30-day underwriter option that could push it up to $287.5 million. That’s the main reason for the stock’s drop today—this offering is dilutive to current shareholders. That said, don’t overthink it. This is a “normal” event for a development-stage company that’s about to commercialize its first treatment and the stock’s reaction is also in the realm of reasonable reactions. What happens next will help us determine how high demand is for this company’s stock. In the good-case scenario, we will see a solid offer price for the stock, a surge in trading volume when it hits, then a rebound in the stock in the weeks after. If the stock falters after the offering, we’ll know demand isn’t as high as we like. In the meantime, don’t do anything—just ride this out. We’re up nearly 100% so we have some wiggle room to let the stock jump around. Nothing here changes the fundamental growth story of this exciting company. HOLD
Endava (DAVA) also just reported Q2 fiscal 2020 results that beat on the top and bottom lines. The U.K.-based company reported that revenue was up 19.6% (to £85.9 million) and adjusted EPS of EPS £0.30 was up 50% and beat by £0.09. Shares are up over 10% today as a result. Cutting through all the details the punchline is that digital transformation remains a priority for companies around the world and Endava is helping in those transitions, particularly in the area of payments and financial services (53% of revenue). It sees constant currency revenue up 25% to 26% for the full fiscal year, with adjusted EPS of £0.95 to £0.99. The stock’s reaction is a big pop that has sent it to a new all-time high. While I like it, let’s not get too aggressive. I’m keeping at hold to see how Endava digests the report. HOLD
Kornit Digital (KRNT) reported Q4 results that saw revenue meet expectations, up 29% to $48.7 million, while adjusted EPS of $0.17 missed by a penny. Recall that this is a play on digital printing on textiles and Kornit is working with a growing list of athleisure and specialty retail companies, including Hanesbrands, Spreadshirts, Amazon, Adidas, and more, to bring this exciting technology to market. The stock hasn’t reacted much to the report (still trading at all-time highs) and remains at hold. It’s up around 40% since we jumped in. HOLD
As a final note, I know the market can seem crazy at times, especially during earnings season. It can be hard to keep your cool when headlines are coming at you regarding everything from global growth to disease to specific company reports, and stocks seem to be going up, down and sideways as a result. All I can say is remain calm in the face of all this noise. Most of the time short-term reactions smooth out within a few days.
I leave you with this picture to illustrate the point, which I clipped from Yahoo Finance’s website just a short while ago. A quick look at the headline and the changes in the major market indices on the day is all that’s needed!
