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Compound Collaboration, Month #16
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday. I hope to use these memos as an educational tool to teach them about the world. With any luck, managing the portfolio will become a shared activity to collaborate on as they grow up.
It is one of the main reasons why I invest.
Performance from the first 15 months:
Month #1 Aug 2020: $ARKK +26%
Total portfolio return: 69.1%
This month's addition: Digital Turbine $APPS
Digital Turbine is an ad-tech company.
What they used to do: Pre-install apps onto mobile phones.
Over the last couple of years through a series of acquisitions they've completely transformed their business.
What they are now: A platform for mobile advertising which has both supply-side and demand sides of the market.
Four or five years ago they were only installed on around 15 million devices. Today they are now installed on almost 600 million Android phones.
A key product: single-tap app installs. Instead of going to the Google play store and hitting download and install, you can just click on an ad and immediately download the app to your phone. This is something app developers are willing to pay a lot for.
They are now producing profits on an Adjusted EBITDA basis and non-GAAP EPS basis.
The Bull Case:
- Strong Macro trends: Mobile advertising is a huge category and there will be a lot more dollars transitioning to mobile advertising in the coming years.
- Sales and marketing spend is small compared to their gross profit, which means they can grow without spending tons of money on sales and marketing.
- Network effects around building a buy and sell-side platform for mobile advertising. There are switching costs once mobile carriers and advertisers start using Digital Turbine's platform.
- Free cash flow and earnings are positive, which is great because they can fund their own growth going forward.
Bear Case
- Balance Sheet: Lots of goodwill from the acquisitions (goodwill is not good), and also lots of long term debt and not a lot of cash in comparison.
- Concentration risks: $APPS sells into several of the large mobile phone carriers. Revenue is only coming from a few sources.
- Has primarily grown by acquisitions. Integrating acquisitions successfully is hard.
- Dependence on Google. Google could pull the rug on Digital Turbine and there wouldn't be much they could do about it.
Digital Turbine is down 41% in the last month— which is even more than some similar growth names like:
$ROKU (-28%)
$PYPL (-20%)
$MELI (-20%)
$FVRR (-18%)
The Bet:
Now is a good entry to buy a fast growing company that can really shine in the mobile advertising space in the coming years.
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