APPS Stock Is Set to Face a Struggle

Digital Turbine (NASDAQ:APPS) and its investors have been on quite a journey since the company listed as a penny stock in July 2006. I think it’s safe to say that APPS stock provides testimony that multi-baggers can occur from the most niche of domains.

However, the past is the past, and APPS stock has turned into a mainstream asset, possessing less asymmetrical returns, thus initiating importance in pricing the stock accurately.

I wanted to provide judgment on this stock because of the shape action it holds, but I wanted to take an ulterior vantage point in my analysis. My method of choice was to look at the stock’s call option prices to gauge risk. I’ve managed to make a few valuable inferences from the options market and hope investors find them insightful.

APPS Option Price and What This Means for Risk

The Black-Scholes and Merton pricing model is widely used across the investment industry to find the fair price of options. Many traders have applied the model with reasonable accuracy, whether it’s been used in isolation to trade on options or alternatively to draw market sentiment inferences from.

The model has five or six inputs to it, depending on whether the stock pays dividends or not, which APPS stock doesn’t. The inputs are the underlying stock price, the time to maturity in days, the 10-year U.S. Treasury bond yield and the implied volatility.

I decided to price Digital Turbine’s June 17th call option with a strike price of $60. My rationale here has to do with horizon and moneyness. The option’s duration provides a more holistic view of the half-year market sentiment, and the strike price of $60 is out of the money, meaning that it provided me with adequate breath to provide solid inferences.

I used February the 3rd’s pre-market data to price this option and found that the market quotes are underpriced relative to the fair value of the option. According to Barchart, the sampled brokers charged $3.10 per call option, while the fair value of the option at the time was estimated at $4.43. To me, this signals disbelief by the market; it doesn’t seem as though investors are happy with APPS stock, with evidence suggesting that demand from price makers is missing.

This could well spill over into the underlying stock this year, subsequently causing the returns to be negatively skewed with higher drawdowns in market downturns than gains in market upturns.

A More Conservative View

I took an innovative route to judge Digital Turbine’s market risk, requiring me to validate my findings with more of a traditionalist’s approach. The chart below plots APPS stock’s relationship with the Cboe Volatility Index (VIX) over the past year, and it’s reasonable to suggest that we can make assumptions on the stock’s prospects if one considers the negative correlation between the two.

Source: Gurufocus

Bank of America Analyst Savita Subramanian, recently told CNBC, “It’s going to be a year where we are shocked by the volatility.”

Savita is one of many expecting high volatility this year. Her claims make sense to me, considering the market sentiment. The narrative is that we’ll see up to five interest rate hikes, more economic re-openings and an anticipated shift from growth to value stocks. There’s absolutely nothing indicating that we’ll have a flat year, and if investors comprehend this, we’re likely to see APPS stock struggle if historical correlations are anything to go by.

What Now for APPS Stock?

Digital Turbine has traditionally traded with a high-risk profile and could continue to do so. The stock has been positively skewed on its amazing growth trajectory, but I believe we could see the asymmetry shift with drawdowns being more severe than the bull runs.

The quoted option prices currently underscore their fair value, indicating that investors have a risk-off tone on APPS stock.

On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Benzinga, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.

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