In this article I am going to calculate the intrinsic value of Digital Turbine Inc (NASDAQ:APPS) using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after February 2018 then I highly recommend you check out the latest calculation for Digital Turbine here.
Crunching the numbers
We are going to use a two-stage DCF model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Generally I like to use analyst consensus estimates for free cash flow, but given that APPS has low analyst coverage with no forecast available, I have extrapolated the most recent reported free cash flow (FCF) based on the average annual revenue growth over the past five years, capped at a reasonable level, and discounted these values at the rate of 9.41%. This resulted in a present value of 5-year cash flow of $30.7M. Keen to know how I calculated this value? Check out our detailed analysis here.
In the visual above, we see how how APPS’s top and bottom lines are expected to move going forward, which should give you some color on APPS’s outlook. Secondly, I calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is $103.2M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $134.0M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $1.78, which, compared to the current share price of $2.02, we see that Digital Turbine is fair value, maybe slightly overvalued at the time of writing.
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For APPS, I’ve compiled three key aspects you should further examine:
- 1. 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.
- 2. 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.
- 2. 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. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass 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.