Developing Premium Products Will Drive Future Market Differentiation

Key Takeaways

• Strategic focus on profitable growth aims to stabilize growth, enhance cash flow, and improve revenue and operating margins long-term.
  
• R&D and AI investments for product differentiation aim to support revenue growth and improve net margins through premium features.
  
• Thinkific's shift to targeting larger customers could lead to short-term revenue instability and increased exposure to foreign exchange risks.

Catalysts

Engages in the development, marketing, and support management of cloud-based platform in Canada, the United States, and internationally.

• Thinkific's focus on transitioning to a strategy centered on profitable growth, including accelerated investment to scale Thinkific Plus and expand Thinkific Commerce, is aimed at stabilizing top-line growth and enhancing operational cash flow. This is expected to improve revenue and operating margins long-term.
  
• The company's shift towards targeting a more profitable customer segment likely to succeed with higher ARPU and GMV is anticipated to grow ARPU and overall revenue. This focused strategy could reduce customer churn and enhance net margins.
  
• The expansion of commerce offerings internationally and the rollout of new features aimed at large customers, particularly in Plus, is intended to increase GMV and commerce revenue. This could significantly impact overall revenue and potentially improve earnings.
  
• Thinkific's investment in R&D and AI to develop unique, premium products tailored to their target customers' unmet needs is strategic for product differentiation, supporting revenue growth, and possibly improving net margins by adding higher valuation features.
  
• The emphasis on increasing adoption and successful onboarding for higher GMV customers through AI-enabled onboarding and user experience enhancements aims to drive long-term positive impacts on revenue and improve the company’s EBITDA margins.

Thinkific Labs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Thinkific Labs's revenue will grow by 9.8% annually over the next 3 years.
• Analysts are not forecasting that Thinkific Labs will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Thinkific Labs's profit margin will increase from -0.4% to the average CA Software industry of 15.8% in 3 years.
• If Thinkific Labs's profit margin were to converge on the industry average, you could expect earnings to reach $14.0 million (and earnings per share of $0.17) by about March 2028, up from $-237.0 thousand 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 21.4x on those 2028 earnings, up from -629.6x today. This future PE is lower than the current PE for the CA Software industry at 25.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Thinkific Labs Future Earnings Per Share Growth

Risks

• The transition towards a more focused strategy may cause near-term impacts on GMV and ARR due to the shift in customer targeting, potentially affecting short-term revenue stability.
  
• Slowing GMV growth and a shift in customer focus may lead to potential short-term challenges, impacting Thinkific's capacity to maintain commerce revenue.
  
• The risk of foreign exchange rate fluctuations, particularly with exposure to the pound and euro, could negatively influence ARR and revenue growth in 2025.
  
• Uncertainty in macroeconomic conditions and competitive pressures may lead to challenges in achieving anticipated customer acquisition costs, impacting marketing efficiency and earnings.
  
• The change in strategy to focus on Plus and larger customers, shifting from a broader customer base, might result in churn within less profitable customer segments, affecting subscription revenue growth.

Valuation

• The analysts have a consensus price target of CA$4.237 for Thinkific Labs 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$5.52, and the most bearish reporting a price target of just CA$3.48.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $88.5 million, earnings will come to $14.0 million, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of CA$3.15, the analyst price target of CA$4.24 is 25.6% 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.