digital turbine (NASDAQ:APPLICATIONS) and its investors have come a long way since the company went public in July 2006. I think it’s safe to say that APPS stocks are testimony that multi-baggers can happen in most niche areas .
Source: Shutterstock
However, the past is the past, and APPS shares have become a mainstream asset, possessing less skewed returns, which has helped to accurately determine the stock price.
I wanted to pass judgment on this stock due to the shape action it holds, but wanted to take a later perspective in my analysis. My method of choice was to look at stock option prices to assess risk. I managed to draw some valuable inferences from the options market and I hope investors find them insightful.
APPS option price and what it means for risk
The Black-Scholes and Merton pricing model is widely used in the investment industry to find the right price for options. Many traders have applied the model with reasonable accuracy, whether it was used in isolation to trade options or to draw conclusions about market sentiment.
The model has five or six entries to this, depending on whether the stock pays dividends or not, which APPS stock does not. The input data is the price of the underlying stock, the expiry date in days, the 10-Year U.S. Treasury Bond Yield and implied volatility.
I have decided to price Digital Turbine’s June 17 call option with a strike price of $60. My rationale here has to do with horizon and money. The option duration provides a more holistic view of semi-annual market sentiment, and the $60 strike price is out of the money, meaning it gave me enough breathing room to provide inferences solid.
I used the February 3rd pre-market data to price this option and found that the market quotes were undervalued relative to the fair value of the option. According to Barchart, the sampled brokers accused $3.10 per call option, when the fair value of the option at the time was estimated at $4.43. To me, this signals the disbelief of the market; it doesn’t look like investors are happy with APPS shares, with evidence suggesting demand from price makers is lacking.
This may well trickle down to the underlying stock this year, subsequently causing negative distortion of returns with larger declines in market downturns than gains in market upturns.
A more conservative view
I took an innovative route to judging Digital Turbine’s market risk, which required me to validate my findings with a more traditionalist approach. The chart below plots the relationship between APPS stock and the Cboe Volatility Index (VIX) over the past year, and it’s reasonable to suggest that we can make assumptions about the stock’s outlook. considering the negative correlation between the two.
Source: Gurufocus
Savita Subramanian, analyst at Bank of America, said recently CNBC“It’s going to be a year where we are shocked by the volatility.”
Savita is one of many to expect high volatility this year. His assertions make sense to me, given market sentiment. The narrative is that we will see until five interest rate hikes, more economic reopenings and an early shift from growth stocks to value stocks. There is absolutely no indication that we will have a flat year, and if investors understand this, we will likely see APPS stocks 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 may continue to do so. The stock has been positively skewed on its incredible growth trajectory, but I think we could see the asymmetry shift with more severe declines than bull runs.
Listed option prices are currently emphasizing their fair value, indicating that investors have a risk tone on APPS shares.
At the date of publication, Steve Booyens did not hold (neither directly nor indirectly) any position in the securities mentioned. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has since been responsible for equity research and public relations. Prior to founding the company, Steve spent time 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.
