New AI Offerings Lumi And Creator+ Will Expand Global Market Reach

Key Takeaways

• New product offerings and strategic AI integration are anticipated to enhance learning experiences, driving adoption and potential revenue growth.
  
• International market expansion and acquisitions like H5P could significantly boost D2L’s market share and revenue opportunities.
  
• Increased competition and pricing pressure, macroeconomic challenges, currency impacts, and execution risks pose significant threats to D2L's future revenue and profitability.

Catalysts

D2L Inc. 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 rest of world.

• The introduction of new product offerings, such as D2L Lumi and Creator+, and the strategic integration of AI into workflows, is expected to enhance the learning experience significantly, driving increased adoption and customer satisfaction, potentially accelerating revenue growth.
  
• Expansion into new international markets, including Brazil and India, as well as increased penetration in established markets, could lead to significant market share gains and revenue growth opportunities.
  
• Strong demand for professional services, aided by new product implementations and strategic transformations among customers, may drive an increase in both services revenue and net margins.
  
• The acquisition of H5P and enhancements to Creator+ broaden D2L's product portfolio, opening up cross-sell opportunities with existing clients, which could lead to increased revenue per customer and overall revenue growth.
  
• As AI technology adoption increases, it may serve as a catalyst for renewed market activity, leading to more RFPs and investments from institutions seeking innovative learning platforms, potentially boosting D2L's revenue and market presence.

D2L Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming D2L's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 18.5% in 3 years time.
• Analysts expect earnings to reach $47.8 million (and earnings per share of $0.76) by about February 2028, up from $6.4 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 21.1x on those 2028 earnings, down from 114.9x today. This future PE is lower than the current PE for the CA Consumer Services industry at 115.0x.
• Analysts expect the number of shares outstanding to grow by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.26%, as per the Simply Wall St company report.

D2L Future Earnings Per Share Growth

Risks

• There is a risk associated with the macroeconomic environment, as lower RFP activity suggests potential challenges in securing new contracts, which could impact future revenue growth.
  
• The integration of non-IFRS financial measures and unexpected costs related to past acquisitions, such as nonrecurring legal and professional fees, may obscure true profitability and could influence earnings.
  
• The reliance on specific markets with fluctuating currency impacts, as seen with the strength of the U.S. dollar, could affect revenue consistency and profitability due to foreign exchange rates.
  
• Increased competition and pricing pressure, especially with recent industry consolidation (e.g., Canvas acquisition), could challenge D2L's market share and affect its revenue growth.
  
• Dependence on successful execution of product expansion and customer adoption, particularly in emerging international markets, poses execution risks which could impact future projections of revenue and profit margins.

Valuation

• The analysts have a consensus price target of CA$21.623 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$24.16, and the most bearish reporting a price target of just CA$12.58.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $258.1 million, earnings will come to $47.8 million, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of CA$19.22, the analyst price target of CA$21.62 is 11.1% higher.
  
• 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.