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Greenhaven Road Capital Keeps Optimism in Digital Turbine (APPS)

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Greenhaven Road Capital, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of approximately 6% net of fees was recorded by the fund for the second quarter of 2021, bringing YTD returns to approximately 21%. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Greenhaven Road Capital, the fund mentioned Digital Turbine, Inc. (NASDAQ: APPS), and discussed its stance on the firm. Digital Turbine, Inc. is an Austin, Texas-based software company, that currently has a $5.8 billion market capitalization. APPS delivered a 11.00% return since the beginning of the year, impressively extending its 12-month returns to 352.31%. The stock closed at $64.32 per share on July 29, 2021.

Here is what Greenhaven Road Capital has to say about Digital Turbine, Inc. in its Q2 2021 investor letter:

"Digital Turbine (APPS) – Our largest holding is Digital Turbine, which is covered by four sell side analysts. The company announced three acquisitions in during the first half of this year. In both the press release announcing the closing of the Fyber acquisition as well as in a subsequent investor presentation, Digital Turbine indicated that, on a pro forma basis including the acquisitions, revenue would more than triple while the share count would go up less than 15%. Only one of the four analysts provided any update to their clients. If tripling a business does not merit an update, I am not sure what does. I am forever grateful to Professor Jack McDonald for giving me the skills to analyze a business independent of the sell side, which can be very slow in the land of small caps.

At a sell side conference, management also indicated that their SingleTap product was gaining significant traction, with the CEO commenting that “[t]his has been a seven-figure business. And now when we talked a few months ago… we took us from a seven-figure business on a yearly basis to a seven-figure business on a quarterly basis. So great progress. We're seeing some nice scaling there, and I'm pleased to report today we're talking about seven figures on a WEEKLY basis.” The stock traded down on this news. For a company that did $330M in revenue last year, it is odd that they are now run-rating more than $50M a year on a high margin product that was barely a mention a year ago. Sell side reaction? Crickets. Even though it was our largest position and up more than 10X from initial purchases, I bought more shares. Profitable companies growing in the triple digits selling for five times current year revenues are rare. Time will tell if these were profitable purchases, but I think the outcomes are skewed in our favor."

Software
Software

Based on our calculations, Digital Turbine, Inc. (NASDAQ: APPS) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. APPS was in 22 hedge fund portfolios at the end of the first quarter of 2021, compared to 23 funds in the fourth quarter of 2020. Digital Turbine, Inc. (NASDAQ: APPS) delivered a -16.61% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

Disclosure: None. This article is originally published at Insider Monkey.