Addition Of 165,000 New Paid Seats Will Expand User Base And Service Efficiency

Key Takeaways

• Strategic partnerships and product innovation could lower costs and enhance market reach, boosting earnings and revenue growth.
  
• Robust customer retention strategies and new paid seat additions support sustained revenue growth and long-term profitability.
  
• Dependency on FX trends, lower ARPU, and acquisition risks could impact Dropsuite's revenue stability, operational efficiency, and long-term shareholder value.

Catalysts

Operates a cloud-based software platform worldwide.

• Dropsuite has demonstrated consistent growth in annualized recurring revenue (ARR), nearing $50 million with a record increment of $2.7 million in the most recent quarter. This suggests a strong potential for future revenue growth as the company continues to attract new users and partners.
  
• The addition of 165,000 new paid seats and a focus on optimizing storage configurations indicate an ongoing effort to enhance their product offerings and customer satisfaction. This can lead to improved net margins as economies of scale and efficiencies in service delivery are realized.
  
• The introduction of the Bring Your Own Storage product allows partners to use their own storage solutions, lowering Dropsuite's infrastructure costs while maintaining healthy gross margins. This strategic move could enhance overall earnings by reducing operating expenses.
  
• The company's strategic partnership and ongoing negotiations with NinjaOne signal potential for expansion and increased market reach via combined solutions for MSP channels, which could significantly boost both revenue and earnings.
  
• Dropsuite's stable churn rate below 3% and strong partnerships with direct and indirect channels highlight a robust customer retention strategy and could lead to sustained revenue growth and enhanced profitability over the long term.

Dropsuite Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dropsuite's revenue will grow by 29.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 9.9% in 3 years time.
• Analysts expect earnings to reach A$7.6 million (and earnings per share of A$0.09) by about February 2028, up from A$1.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$9.8 million in earnings, and the most bearish expecting A$4.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 61.7x on those 2028 earnings, down from 399.1x today. This future PE is greater than the current PE for the AU Software industry at 48.9x.
• 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 7.34%, as per the Simply Wall St company report.

Dropsuite Future Earnings Per Share Growth

Risks

• The fluctuation in foreign exchange rates has been positively impacting revenue in AUD terms, but continued reliance on FX trends could affect earnings stability if the currency movements reverse.
  
• The addition of Bring Your Own Storage options may lower the average revenue per user (ARPU), which could impact revenue growth despite increased user numbers.
  
• The integration and execution risks associated with the proposed acquisition by NinjaOne might affect operational efficiency and thus impact future net margins and earnings.
  
• The deal includes a non-compete clause that prevents seeking better offers, which might restrict potential for achieving a higher valuation and can affect long-term shareholder value.
  
• Uncertainties about Charif Elansari's future role with the company post-acquisition might affect leadership stability and strategic direction, impacting long-term revenue and profitability.

Valuation

• The analysts have a consensus price target of A$5.433 for Dropsuite 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$5.9, and the most bearish reporting a price target of just A$4.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$76.6 million, earnings will come to A$7.6 million, and it would be trading on a PE ratio of 61.7x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of A$5.8, the analyst price target of A$5.43 is 6.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.