Digital Ad Risks Will Sour Outlook While Enabling Modest Rebound

Key Takeaways

• Verve's growth faces challenges from tech giants' consolidation, stricter privacy regulations, and commoditization leading to declining ad prices and limited targeting effectiveness.
  
• Heavy investments in technology, talent, and expansion risk margin erosion, especially if revenue gains can't consistently outpace rising costs and shifting digital ad consumption trends.
  
• Intensifying competition, regulatory challenges, and rising costs threaten Verve Group's revenue growth, profitability, and ability to maintain stable market share in digital advertising.

Catalysts

A digital media company, engages in the provision of ad-software solutions in North America and Europe.

• While Verve Group is positioned to benefit from the accelerating transition of ad spend from traditional to digital channels and has posted strong organic revenue growth of 16% in Q1, the company faces ongoing risks from supply consolidation among tech giants like Google, which is increasingly channeling spend into its own walled gardens such as YouTube, potentially restricting Verve's access to premium inventory and exerting downward pressure on revenue expansion.
  
• Although the company is an early mover in privacy-first, ID-less advertising solutions and continues to invest in proprietary technologies like ATOM to serve privacy-conscious clients, the trend toward stricter privacy regulation and rapid deprecation of third-party data may reduce the effectiveness of digital advertising overall, raising barriers for campaign targeting and risking slower net margin growth if advertisers pull budget due to lower perceived value.
  
• Despite the proliferation of connected devices and the growth of new premium inventory formats such as CTV and digital audio-which should expand Verve's addressable market-industry-wide commoditization and an influx of new supply in CTV have already contributed to falling CPMs, which threatens to offset gains in ad impressions and could directly hinder top-line revenue growth.
  
• While Verve is aggressively investing in platform unification, salesforce expansion, and innovation-including AI-driven targeting-these efforts require significant ongoing capital expenditures and hiring of expensive technical talent, risking margin erosion if revenue growth does not consistently outpace higher operating expenses, particularly in a volatile ad market environment.
  
• Even though Verve Group's global expansion and diversified client acquisition have reduced some geographic and client concentration risk, the company remains exposed to market-specific downturns and the risk that increased adoption of ad-blocking and ad-free digital environments may shrink the overall digital ad audience, potentially affecting both customer retention and longer-term growth in earnings.

Verve Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Verve Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Verve Group's revenue will grow by 10.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.8% today to 14.3% in 3 years time.
• The bearish analysts expect earnings to reach €92.8 million (and earnings per share of €0.44) by about July 2028, up from €28.4 million 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 10.0x on those 2028 earnings, down from 21.6x today. This future PE is lower than the current PE for the DE Media industry at 27.3x.
• Analysts expect the number of shares outstanding to grow by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.97%, as per the Simply Wall St company report.

Verve Group Future Earnings Per Share Growth

Risks

• Consolidation of digital advertising spend by tech giants such as Google, along with their migration of ad volumes to their closed platforms like YouTube, continues to reduce accessible ad budget for independent ad tech firms like Verve Group, placing sustained pressure on revenue growth and market share.
  
• Ongoing increase in privacy regulations, combined with the growing prevalence of ID-less traffic and more users refusing consent, challenges the effectiveness and targeting ability of digital ads; even as Verve invests in ID-less solutions, the data shows this results in reduced ad performance, in turn limiting revenue per impression and potentially impacting EBITDA margins.
  
• Heightened operating expenses from continual investment in sales force expansion, technology, AI-driven innovation, and global market entries may erode net margins, especially if revenue does not keep pace with these higher OpEx levels-a risk highlighted alongside possible mid-term EBITDA margin compression.
  
• Industry-wide commoditization of programmatic ad technology, exemplified by CPM declines in high-growth channels like CTV due to oversupply and competitive pricing, is creating persistent downward pressure on take rates and gross margins for intermediaries such as Verve Group.
  
• Macroeconomic uncertainty, geopolitical tensions, and volatility in ad budgets (with client churn and unpredictable short-term ad spend, particularly in sensitive sectors like automotive) introduce earnings volatility and risk to sustained double-digit organic revenue growth, potentially impacting both top-line and bottom-line financials.

Valuation

• The assumed bearish price target for Verve Group is €3.88, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Verve Group'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 €9.2, and the most bearish reporting a price target of just €3.88.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €648.7 million, earnings will come to €92.8 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of €3.07, the bearish analyst price target of €3.88 is 20.9% 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.