Investments In AI And Platinum Edge Will Drive Future Potential Despite Valuation Concerns

Key Takeaways

• Strategic investments in technology and AI aim to boost future revenue and operating margins through product innovation and enhanced user engagement.
  
• Partnership with Nine and premium product adoption enhance branding and pricing power, supporting stable revenue and earnings growth.
  
• Strong Marketplace strategy, tech investment, and Nine collaboration drive engagement, efficiency, and reduced overheads, enhancing market reach and profitability potential.

Catalysts

Engages in the real estate media and technology services business in Australia.

• Domain is continuing to invest significantly in technology with a focus on platforms, personalization, and privacy, aiming to enhance flexibility in pricing changes, product launches, and user experiences. This foundational investment is expected to drive future revenue growth.
  
• The introduction and strong adoption of new premium products, such as Platinum Edge and Audience Boost, have increased depth revenue and are expected to sustain pricing power and therefore positively impact future revenue and earnings.
  
• Domain is enhancing its collaboration with Nine, leveraging cross-platform branding opportunities and optimizing print offerings, such as the relaunch of Prestige Victoria. This strategic partnership is expected to bolster audience engagement and support revenue growth.
  
• A transformation in Domain's billing and pricing systems is anticipated, allowing more efficient price updates and promotional flexibility starting FY '26. This efficiency is likely to support stable or enhanced net margins over time.
  
• Ongoing investment in machine learning and AI is expected to complement their digital strategy, potentially improving user engagement and cost savings, which may positively impact operating margins and earnings.

Domain Holdings Australia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Domain Holdings Australia's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.2% today to 16.6% in 3 years time.
• Analysts expect earnings to reach A$82.3 million (and earnings per share of A$0.13) by about February 2028, up from A$53.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.5x on those 2028 earnings, down from 51.3x today. This future PE is lower than the current PE for the AU Interactive Media and Services industry at 51.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Domain Holdings Australia Future Earnings Per Share Growth

Risks

• Domain’s Marketplace strategy is showing strong progress with new product uptake and innovations like Platinum Edge and Audience Boost. A 50% year-on-year increase in higher value Platinum Edge contracts supports strong growth in pricing and revenue.
  
• Domain is investing in technology transformation, focusing on platforms, personalization, and privacy/cybersecurity. This foundational investment is within the cost base, allowing for maintained margins and expected future revenue growth through faster product launches and cost-saving efficiencies.
  
• Unique audience growth of 10% and site visits up by 23% year-on-year surpass competitor growth rates, indicating enhanced engagement and potential for increased revenue from both digital listings and advertising.
  
• Domain strengthened its collaboration with Nine, creating opportunities for cross-platform branding and distribution, which could improve market reach and advertising revenue.
  
• The company continues to drive productivity gains and cost savings, reflected in a 17% reduction in corporate overheads, supporting stable EBITDA margins even as investment continues, potentially enhancing net margins and profitability.

Valuation

• The analysts have a consensus price target of A$3.418 for Domain Holdings Australia based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.2, and the most bearish reporting a price target of just A$2.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$495.0 million, earnings will come to A$82.3 million, and it would be trading on a PE ratio of 32.5x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$4.37, the analyst price target of A$3.42 is 27.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.