Upmarket Risks And Competition Will Delay Progress But Spark Turnaround

Key Takeaways

• Thinkific's move toward enterprise clients and emphasis on AI adds execution risk, with uncertainty around offsetting customer churn and potential loss of competitive differentiation.
  
• Ongoing investment demands and rising customer expectations may hinder profitability and drive uneven earnings despite a stable subscription base and healthy balance sheet.
  
• The shift upmarket brings churn, higher costs, operational risks, and exposes Thinkific to fierce competition, pressuring profitability and requiring sustained investment to remain competitive.

Catalysts

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

• While Thinkific benefits from the continued global digital transformation and the proliferation of cloud-based solutions-positioning it well to capture rising demand for online learning-the company faces heightened execution risk as it shifts its focus upmarket and targets enterprise clients, where longer sales cycles and complex onboarding requirements could temper revenue acceleration in the near to medium term.
  
• Although the increasing adoption of lifelong learning and upskilling trends worldwide creates a secular tailwind, Thinkific's near-term growth may be hampered by elevated churn among legacy self-serve customers and potential difficulties in fully offsetting this with higher-value Plus customer acquisition, affecting overall ARR and retention rates.
  
• Despite Thinkific's aggressive investment in artificial intelligence to drive product differentiation and operational efficiency across R&D and customer support, the rapid mainstreaming of AI by larger competitors or new entrants could reduce the company's technological edge and exert downward pressure on net margins if feature parity is achieved industry-wide.
  
• Even though the company's expansion of commerce and B2B features is intended to increase ARPU and tap into the growing creator economy, there remains the risk that intensifying customer expectations for seamless, end-to-end solutions could require ongoing, substantial R&D spend, delaying material improvement in long-term operating margins or sustainable profitability.
  
• While Thinkific's strong balance sheet and recurring subscription model should provide some insulation and strategic flexibility, upcoming periods of investment-heavy product development and go-to-market execution-coupled with possible regulatory complexity in global expansion-may result in uneven earnings and muted cash flow growth over the next several quarters.

Thinkific Labs Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Thinkific Labs compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Thinkific Labs's revenue will grow by 8.3% annually over the next 3 years.
• The bearish 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 1.0% to the average CA Software industry of 11.6% in 3 years.
• If Thinkific Labs's profit margin were to converge on the industry average, you could expect earnings to reach $10.5 million (and earnings per share of $0.16) by about August 2028, up from $675.0 thousand today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.4x on those 2028 earnings, down from 128.4x today. This future PE is lower than the current PE for the CA Software industry at 51.6x.
• Analysts expect the number of shares outstanding to decline by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

Thinkific Labs Future Earnings Per Share Growth

Risks

• Thinkific's pivot upmarket is creating expected elevated churn among lower-value, non-ideal customers, which is likely to suppress ARR growth and net revenue retention in the near to medium term until the transition completes and higher ARPU customers offset those losses. This increases risk to both top-line revenue growth and overall earnings predictability during the transition period.
  
• The company is committing significant investments in R&D, sales, and marketing to support new upmarket features, AI integration, and sales force expansion, which could weigh on operating expenses and suppress near-term net margins, particularly if revenue growth does not accelerate as quickly as planned.
  
• Sales force turnover and related disruption in onboarding and ramping new sales team members have caused delays in Plus (upmarket) ARR growth, resulting in longer sales cycles and underperformance relative to expectations, making the upmarket execution vulnerable to operational risk and posing downside risk to revenue and earnings momentum.
  
• Growing reliance on high-value enterprise and Plus customers increases exposure to intense competition from more established LMS providers, platform consolidation, and potentially larger tech players leveraging AI at scale, heightening the risk of margin compression, pricing pressure, and customer acquisition costs-impacting both ARPU and overall profitability.
  
• The ongoing industry shift toward fully integrated, end-to-end solutions means Thinkific will need to continuously invest in product development to keep pace with customer demands, which will require sustained capital outlays and may widen the competitive gap against better capitalized rivals, potentially limiting future margin expansion and overall earnings growth.

Valuation

• The assumed bearish price target for Thinkific Labs is CA$2.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Thinkific Labs's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$5.01, and the most bearish reporting a price target of just CA$2.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $89.7 million, earnings will come to $10.5 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of CA$1.76, the bearish analyst price target of CA$2.5 is 29.6% 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.