Shares of application software company Digital Turbine Inc. (APPS, Financial) plunged more than 12% on Friday. The Austin, Texas-based technology company reported fiscal second-quarter 2021 results after the closing bell on Thursday, topping analysts' expectations.
The post-earnings decline has now pushed shares of the company down more than 32% since Oct. 14. The company's market value is still up nearly 280% this year, which suggests the pullback may not be over. The Peter Lynch earnings line also indicates that the stock could be massively overvalued.
Highlights from recent quarterly results
For the quarter, Digital Turbine reported earnings of 15 cents per share, which beat analysts' expectations of 11 cents. This represents a 200% increase from 5 cents per share posted last year.
Digital Turbine's revenue of $70.89 million grew more than 100% from $32.80 million posted in the prior-year quarter.
The company's adjusted free cash flow stood at $21.5 million as compared to $5.7 million at the end of the year-ago quarter. The gross margin also improved to 43% from 39%.
CEO Bill Stone said that Digital Turbine's results exceeded expectations after building upon the breakout momentum recorded in the first quarter.
"We set all-time revenue, profitability, and free cash flow records, and we accelerated top-line growth and profitability amid powerful secular tailwinds that are driving strong demand for both our Application Media and Content Media service offerings," he said.
Valuation
From a valuation perspective, shares of Digital Turbine are trading at a trailing price-earnings ratio of 98.10, which is high for an application software company. The company's forward price-earnings ratio of 58.82 is also relatively high when compared to the forward price-earnings ratio of close peer InseeGo Corp. (INSG, Financial), which is 33.78.
When we factor in the expected earnings per share for the next five years, however, Digital Turbine appears relatively cheaper with a PEG ratio of 1.18 compared to InseeGo's equivalent of 1.69.
In summary, Digital Turbine's valuation multiples are significantly high for an application software company. However, its projected earnings growth could be part of the reason why investors are willing to pay a high premium. But even so, the stock still looks overvalued when compared to the Peter Lynch earnings line. It could be a while before a major rebound occurs.
Disclosure: No positions in the stocks mentioned.
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