Digital Turbine Inc (NASDAQ:APPS) Investors Are Paying Above The Intrinsic Value
Does the share price for Digital Turbine Inc (NASDAQ:APPS) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not August 2018 then I highly recommend you check out the latest calculation for Digital Turbine by following the link below.
See our latest analysis for Digital Turbine
Crunching the numbers
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To start off with we need to estimate the next five years of cash flows. The sum of these cash flows is then discounted to today’s value.
5-year cash flow forecast
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF ($, Millions) | $3.78 | $4.50 | $5.31 | $6.21 | $7.21 |
Source | Est @ 20%, capped from 24.31% | Est @ 19%, capped from 24.31% | Est @ 18%, capped from 24.31% | Est @ 17%, capped from 24.31% | Est @ 16%, capped from 24.31% |
Present Value Discounted @ 9.95% | $3.44 | $3.72 | $3.99 | $4.25 | $4.48 |
Present Value of 5-year Cash Flow (PVCF)= US$19.89m
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 10%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$7.21m × (1 + 2.9%) ÷ (10% – 2.9%) = US$105.96m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$105.96m ÷ ( 1 + 10%)5 = US$65.94m
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$85.83m. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $1.12. Compared to the current share price of $1.45, the stock is fair value, maybe slightly overvalued at the time of writing.
Important assumptions
I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Digital Turbine as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 10%, which is based on a levered beta of 0.993. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For APPS, I’ve put together three essential aspects you should further examine:
Financial Health: Does APPS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does APPS’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of APPS? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
