Inconspicuous is an adjective meaning something that's not attracting attention, which perfectly describes this article's three growth stocks. Both Digital Turbine (APPS -7.46%) and ironSource (IS) work with app developers to increase visibility and monetization. Floor & Decor Holdings (FND -1.16%) operates a chain of home-improvement stores. And all three are trading near 52-week lows.
With the market down meaningfully from its highs, I believe investors should be looking for buying opportunities. But you've probably already considered the high-profile companies that always make headlines. That's why I wanted to highlight a few lesser-known opportunities for those with some extra cash to invest -- say $5,000. Here's why you should consider these companies, starting with my lowest-conviction idea and moving to my highest.
Image source: Getty Images.
1. Digital Turbine
According to Business of Apps, there are 2.8 billion active Android users (the mobile operating system from Alphabet's Google), which is 75% of the mobile market. However, most of these Android users come from markets where monetization is low. Reflecting this reality, spending on mobile apps on Apple devices outpaced spending on Android devices roughly 2 to 1 in the first quarter of 2022, according to Sensor Tower, a figure that is historically normal.
While spending is higher on Apple devices, the opportunity is still large on Android, which is where Digital Turbine does business. Its software comes pre-installed on Android devices, and the company has a good working relationship with Google (they're strategic partners).
Likewise, it partners with carriers like Verizon and T-Mobile to get apps downloaded. App developers pay Digital Turbine for this service, and it splits this revenue with the carriers.
Digital Turbine has a $3.6 billion market capitalization as of this writing, meaning it's a small fish in a big ocean that's controlled by companies far more powerful than it is. This is certainly a risk. If any of its partnerships go south, Digital Turbine shareholders would feel the pain.
However, its partnerships appear stable. Moreover, its on-device presence is massive at 600 million as of May 2021. Having software on this impressive number of devices unlocks plenty of opportunities in advertising revenue, ongoing app discovery through its Single-Tap product, and even in-app payments that just started this year.
Digital Turbine has reached $1 billion in trailing-12-month revenue, up roughly 800% from where it was just three years ago. Therefore, the stock trades below a price-to-sales (P/S) ratio of four, which seems cheap given its growth. Moreover, the company is already profitable and has plenty of avenues to grow profits from here. So this is a stock worth a closer look.
2. ironSource
Like Digital Turbine, ironSource is a major player in the app economy, albeit inconspicuously. And I do mean "major." According to management, 88 of the top 100 most-downloaded mobile games were ironSource customers as of the end of 2021. Therefore, there's a good chance you've used an app that uses ironSource's software and you didn't even know it.
IronSource's Sonic platform helps companies get their apps discovered and monetized, and it can even help publish them. And clearly, the company is doing something right in this regard. For example, it only began publishing mobile games for its customers in 2020. But of the 45 games it's published so far, 31 have ranked in the top-10 most downloaded at some point. That's effective.
However, ironSource is an even smaller fish than Digital Turbine. The company generated revenue of just $553 million in 2021. Therefore, as you might expect, a small number of customers make up the bulk of its revenue. It has over 5,500 customers total. But less than 7% of them (358) accounted for 95% of total revenue in 2021. If it loses just a handful of these customers, the business would suffer.
However, ironSource hasn't had a retention problem to date. In 2021, it had a gross retention rate of 98% among customers spending $100,000 or more on the platform -- the ones that make up 95% of revenue. Last year, it had 291 of these customers, and the gross retention rate implies it lost just six of these customers in the past year. But it had 73 new high-end customers by the end of the period, more than making up for the few it lost.
Moreover, ironSource's customers are spending more over time, presumably because its software is simply succeeding at getting apps onto consumer devices. Its net expansion rate in 2021 for all customers was 154%, meaning customers spent $1.54 for every $1 they spent in 2020.
Given its software's effectiveness and its impressive growth (management is guiding for 43% to 48% year-over-year revenue growth in 2022), ironSource is another stock worth considering near its 52-week lows.
3. Floor & Decor
With only 160 locations at the end of 2021, Floor & Decor might not be familiar to you. This is a home-improvement specialty retailer, majoring in flooring options like tile, hardwood, and luxury vinyl. It also carries plenty of items to decorate your homes, especially items management believes are trending.
And it sells this stuff in a big space: 78,000 square feet per location on average. This means its stores aren't quite as big as those of Home Depot or Lowe's. But they're much larger than many other flooring specialty retailers.
The advantage for Floor & Decor is that it stands out from the crowd. It has more on-the-floor options than either its small-outlet specialty peers or the big-box competitors. If you're a homeowner or a contractor who wants to see the flooring before buying, your best bet is going to Floor & Decor.
CEO Thomas Taylor was an executive at Home Depot prior to joining Floor & Decor and believes the chain can expand to 500 locations. It's rapidly moving in that direction, aiming to grow its store count by a 20% compound annual rate for the foreseeable future. And at scale, it believes that it can generate $17 billion in annual sales, up from just $3.4 billion in 2021. And keep in mind that the company is solidly profitable with an 8% net profit margin.
With a fast-growing differentiated retail brand, an experienced management team, and plenty of profits, it's no wonder that Warren Buffett's Berkshire Hathaway has taken notice of Floor & Decor stock. The company recently disclosed a nearly $100 million stake in Floor & Decor. So if you're an investor looking to buy something near its lows, Buffett's optimism here is a reason to take this stock seriously.
Image source: Getty Images.
How to spend $5,000
Whether or not you invest money in Digital Turbine, ironSource, or Floor & Decor stock is entirely up to you. You'd probably want to learn more about each before plopping down your hard-earned cash. But should you decide to invest in these companies, you also need to decide how much to invest.
In my opinion, you'll want to consider how big your portfolio is and how much you expect to invest over time. You don't want to invest too much money in any one stock. A diversified portfolio is the safest path to financial freedom. To stay diversified, I would invest between 1% and 5% of my portfolio in each of these companies today. In your case, maybe that's investing $5,000 in each company or splitting that across the three. Every person's situation is different. The important thing is doing the math for your situation and making sure the size of your positions make sense.
