Global Expansion And Emerging Channel Integrations Will Increase Future Customer Engagement

Key Takeaways

• Dotdigital's focus on expanding geographically and enhancing product innovation may drive revenue growth and increase average revenue per user.
  
• Strategic cross-selling and acquisitions aim to boost recurring revenues, customer retention, and long-term earnings growth.
  
• dotdigital's growth is challenged by flat customer numbers and reliance on SMS revenue, alongside external tax impacts and competitive pricing pressure affecting profitability.

Catalysts

Engages in the provision of intuitive software as a service (SaaS) and managed services to digital marketing professionals worldwide.

• Dotdigital's global expansion strategy through regional hubs (UK, North America, APAC) and recent growth in the Japanese market demonstrates a focus on increasing geographical market penetration, which is likely to enhance revenue growth.
  
• The company's continuous innovation within its product suite, including enhancements in mobile and AI capabilities and integration with emerging channels like TikTok and LinkedIn, is expected to drive higher product adoption and increase average revenue per user (ARPU), impacting overall revenue positively.
  
• Dotdigital's strategic focus on cross-selling Fresh Relevance capabilities and driving up customer engagement through loyalty platforms and influencer management highlights efforts to boost recurring revenues and reduce customer churn, which may enhance net margins and overall earnings.
  
• The introduction of new communication channels, such as WhatsApp integration, and leveraging proprietary AI algorithms for predictive capabilities, suggests a commitment to improving return on investment for customers, potentially leading to increased customer retention and revenue sustainability.
  
• The company's active exploration of acquisitions within key verticals, aiming to provide an all-in-one experience, and careful cash management suggest a strategy to drive both top-line and bottom-line growth, which may include EPS growth from value-accretive M&A activities.

dotdigital Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming dotdigital Group's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.7% today to 14.7% in 3 years time.
• Analysts expect earnings to reach £15.4 million (and earnings per share of £0.05) by about April 2028, up from £11.3 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 32.3x on those 2028 earnings, up from 19.5x today. This future PE is greater than the current PE for the GB Software industry at 26.8x.
• Analysts expect the number of shares outstanding to grow 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 8.05%, as per the Simply Wall St company report.

dotdigital Group Future Earnings Per Share Growth

Risks

• While dotdigital Group shows commendable growth via geographic expansion and strategic partnerships, the flat customer growth numbers despite rising ARPU (average revenue per user) highlight potential challenges in acquiring new clients or expanding market share, which could impact revenue growth.
  
• The company's earnings growth is seemingly impeded by successive adverse changes in tax policies, coupled with ongoing adjustments to R&D schemes, potentially impacting net margins and profitability.
  
• There is a risk associated with the reliance on SMS revenue, which although recurring, remains subject to variability in customer spending patterns, impacting predictable revenue streams.
  
• Despite strong cash conversion and no debt, the potential delay or difficulty in identifying suitable M&A targets for using the cash pile could limit strategic growth initiatives, impacting earnings and strategic positioning.
  
• The ongoing industry competition, exemplified by aggressive pricing strategies mentioned for competitors, could pressure dotdigital to maintain competitive pricing, potentially affecting its net margins and long-term revenue growth.

Valuation

• The analysts have a consensus price target of £1.278 for dotdigital Group 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 £1.5, and the most bearish reporting a price target of just £1.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £104.4 million, earnings will come to £15.4 million, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 8.1%.
• Given the current share price of £0.72, the analyst price target of £1.28 is 43.5% 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.