Limited Global Reach Will Constrain Revenues But Margins May Recover

Key Takeaways

• Weak international traction and brand awareness hinder Deezer's ability to capitalize on global digital trends and expand its subscriber base.
  
• Margin gains from partnerships and cost controls are vulnerable to intense competition, regulatory pressures, and declining core partnership revenues.
  
• Revenue growth and profitability remain vulnerable due to over-reliance on France, partner instability, pricing pressure, and the need for ongoing cost controls rather than organic expansion.

Catalysts

Provides music, lossless HiFi audio, and industry defining features on a scalable platform in France, Germany, the United Kingdom, Brazil, the United States, and internationally.

• While the ongoing proliferation of smartphones and improved mobile internet connectivity worldwide helps expand Deezer's addressable audience, the company's relatively stagnant revenue guidance and declining international subscriber base highlight that it has not effectively converted this secular opportunity into meaningful global growth, limiting potential future revenue expansion.
  
• Although advances in digital payments and subscription models in emerging markets theoretically support user conversion, Deezer's limited brand awareness and slow international rollout mean that its ability to capture these new paying users is uncertain, raising concerns for future top-line growth.
  
• Despite rising consumer appetite for personalized and AI-driven entertainment, Deezer's direct ARPU declined slightly, and competitive pressure from larger platforms may constrain Deezer's ability to fully monetize its AI investment over the long term, which could cap margin improvement.
  
• While Deezer's focus on B2B partnerships and white label offerings boosted ancillary revenues and enabled some gross margin expansion, continued decline in overall partnership subscribers and shrinking contribution from core partnerships could result in less predictable, lower-margin revenue streams, creating future earnings volatility.
  
• Even as disciplined cost controls and operating efficiencies have led to a swing to positive adjusted EBITDA and cash flow, persistent challenges in international scaling, entrenched competition from ecosystem players, and rising regulatory and royalty costs could reverse these hard-won margin gains, constraining sustainable net profit growth.

Deezer Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Deezer compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Deezer's revenue will grow by 7.2% annually over the next 3 years.
• The bearish analysts are not forecasting that Deezer will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Deezer's profit margin will increase from -2.6% to the average FR Entertainment industry of 5.6% in 3 years.
• If Deezer's profit margin were to converge on the industry average, you could expect earnings to reach €37.6 million (and earnings per share of €0.3) by about August 2028, up from €-14.2 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 6.4x on those 2028 earnings, up from -10.0x today. This future PE is lower than the current PE for the FR Entertainment industry at 54.3x.
• Analysts expect the number of shares outstanding to grow by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.04%, as per the Simply Wall St company report.

Deezer Future Earnings Per Share Growth

Risks

• Persistent challenges in growing international revenue and subscriber base, evidenced by ongoing declines and stabilization at lower levels outside France, point to limited geographic diversification and expose Deezer to earnings volatility as its growth remains concentrated in its core French market.
  
• Flat to slightly declining revenue outlook for 2025, with management explicitly warning of no expected increase in average revenue per user, underscores continued pricing pressure and difficultly in driving top-line growth, which raises doubts about the sustainability of improving margins and long-term revenue expansion.
  
• Partnership subscriber declines and the shift away from less profitable cohorts highlight Deezer's vulnerability to changes in B2B relationships; if partners reduce bundling or switch to competitors, this could lead to further revenue contraction and unstable earnings.
  
• Direct average revenue per user is trending down, especially due to user mix shift towards lower-priced family plans and an increasing share of distribution through app stores with lower contribution margins, which could weigh on gross profits and pressure overall net margins.
  
• Despite recent cost-cutting and brief positive adjusted EBITDA, Deezer remains heavily dependent on continued strict financial discipline rather than robust organic growth, so any rebound in marketing or staff costs, or inability to sustain cost cuts as the company attempts to grow, could quickly erode margins and threaten the transition to sustainable profitability.

Valuation

• The assumed bearish price target for Deezer is €1.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Deezer'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 €2.5, and the most bearish reporting a price target of just €1.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €665.5 million, earnings will come to €37.6 million, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 9.0%.
• Given the current share price of €1.19, the bearish analyst price target of €1.5 is 20.7% 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.