Digital Turbine, Inc.'s (NASDAQ:APPS) Price Is Right But Growth Is Lacking After Shares Rocket 93%

The Digital Turbine, Inc. (NASDAQ:APPS) share price has done very well over the last month, posting an excellent gain of 93%. But the last month did very little to improve the 53% share price decline over the last year.

Although its price has surged higher, Digital Turbine may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.8x, considering almost half of all companies in the Software industry in the United States have P/S ratios greater than 4.6x and even P/S higher than 11x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

Check out our latest analysis for Digital Turbine

What Does Digital Turbine's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Digital Turbine's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Digital Turbine.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Digital Turbine's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 25% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 8.5% over the next year. With the industry predicted to deliver 24% growth, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Digital Turbine's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Even after such a strong price move, Digital Turbine's P/S still trails the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As expected, our analysis of Digital Turbine's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Digital Turbine (1 is significant!) that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.