AI-powered Platform Including Lumi Will Shape Markets Amid Uncertainties

Key Takeaways

• AI-driven product expansion is increasing attach rates and deal sizes, improving net revenue retention and boosting overall revenue growth.
  
• Strategic international investments and competitive positioning in North America are expanding market share, sustaining revenue growth despite U.S. sector challenges.
  
• Macro challenges and foreign exchange volatility threaten revenue growth and margins, while non-standard financial measures and heavy international reliance pose additional risks.

Catalysts

Provides cloud-based learning software for higher education institutions, kindergarten to grade 12 schools and districts, and private sector enterprises in Canada, the United States, and internationally.

• The development and implementation of D2L's AI-first learning platform strategy, including products like D2L Lumi, are expected to attract new customers and increase adoption, potentially driving higher revenue growth over the medium term.
  
• D2L's focus on expanding its product portfolio with AI-driven tools is leading to increased attach rates and average deal sizes, which could improve net revenue retention and in turn boost overall revenue.
  
• Strategic investments in international markets are expanding D2L's footprint and market share, providing new revenue streams that could offset challenges in the U.S. higher education sector, thus sustaining revenue growth.
  
• The company's improving competitive position, evidenced by high win rates and market share gains, particularly in North America, suggests potential for increased revenues as D2L continues to outperform its peers.
  
• D2L's continual improvements in operational efficiencies and gross margins, as highlighted by engineered optimizations in cloud technology delivery, could lead to enhanced net margins and profitability.

D2L Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming D2L's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.5% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $25.1 million (and earnings per share of $0.42) by about May 2028, down from $25.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.6x on those 2028 earnings, up from 20.1x today. This future PE is greater than the current PE for the CA Consumer Services industry at 20.1x.
• Analysts expect the number of shares outstanding to decline by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.12%, as per the Simply Wall St company report.

D2L Future Earnings Per Share Growth

Risks

• Macro challenges in the U.S. higher education market, including funding uncertainty and decision-making delays, could lead to slower revenue growth in this critical segment. These uncertainties may impact future earnings as institutions prioritize other needs over upgrading their learning systems.
  
• Foreign exchange fluctuations have already decreased annual recurring revenue significantly, which could continue to pose a risk to revenue and profit margins if currency volatility persists.
  
• Non-IFRS financial measures, while helpful, lack standardization, making it difficult to compare D2L's financial performance directly with that of industry peers. This could lead to investor uncertainty and affect perceived profitability.
  
• Heavy reliance on international expansion may expose D2L to geopolitical and economic risks in other regions, potentially affecting the predictability of revenue streams and net margin consistency.
  
• High expectations for AI to drive future growth come with inherent execution risks, such as the need for continued innovation and market adoption, which, if not met, could lead to a failure to achieve projected revenue growth and market positioning.

Valuation

• The analysts have a consensus price target of CA$17.657 for D2L 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 CA$19.93, and the most bearish reporting a price target of just CA$11.95.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $260.0 million, earnings will come to $25.1 million, and it would be trading on a PE ratio of 31.6x, assuming you use a discount rate of 6.1%.
• Given the current share price of CA$13.25, the analyst price target of CA$17.66 is 25.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.