Digital Identity Challenges Will Hinder Performance Yet Stabilization Will Come

Key Takeaways

• Margin expansion remains challenged by slow revenue growth, rising operating costs, and competitive pressures, especially in the Americas.
  
• Execution risks tied to integration, platform unification, and customer churn may delay or limit the benefits from strategic initiatives and recurring revenue efforts.
  
• Execution challenges, market underperformance, required customer transitions, and competitive pressures threaten both GB Group's growth prospects and its ability to expand margins.

Catalysts

Provides identity data intelligence products and services in the United Kingdom, the United States, Australia, and internationally.

• Although GB Group benefits from the ongoing proliferation of digital transactions and a growing need for robust digital identity verification, the company's near-term revenue growth has repeatedly underperformed expectations and remains only modest, with underlying momentum exposed to cyclical softness in key sectors such as retail and e-commerce.
  
• While increasing global regulatory requirements for AML and KYC should provide steady long-term demand, more stringent or shifting data privacy regulations globally may complicate identity verification processes, potentially increasing operating costs and compressing net margins over time.
  
• Despite the rapid expansion of e-commerce and digital banking that typically favors GBG's suite of solutions, the company faces rising challenges from faster-moving and more innovative competitors, which may erode pricing power, particularly in the Americas, impeding margin expansion and sustained client growth.
  
• Although GBG's strategic refocus on unified global platforms and its investment in AI-driven analytics position it to streamline operations and capture new business, execution risk remains elevated. Integration challenges from previous acquisitions and ongoing organizational transformation initiatives may delay or dilute the realization of expected cost and revenue synergies, thereby limiting future earnings growth.
  
• While the move to cloud-first, SaaS-based identity solutions is supporting higher levels of recurring revenue, GB Group's efforts to convert customers in the Americas from pay-as-you-go to subscription contracts require upfront pricing concessions and carry the risk of customer churn, which could impede improvements in net revenue retention and depress revenue visibility in the medium term.

GB Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on GB Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming GB Group's revenue will grow by 3.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.1% today to 6.8% in 3 years time.
• The bearish analysts expect earnings to reach £21.2 million (and earnings per share of £0.08) by about August 2028, up from £8.6 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 39.8x on those 2028 earnings, down from 64.5x today. This future PE is greater than the current PE for the GB Software industry at 35.7x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.11%, as per the Simply Wall St company report.

GB Group Future Earnings Per Share Growth

Risks

• The company's growth remains heavily weighted to future initiatives and promised acceleration, with repeated references to foundational work rather than tangible market share gains, raising concerns that persistent execution gaps could prevent revenue and earnings growth from meeting market expectations.
  
• Identity and Location segments provided only modest top-line uplift, with Americas performance described as broadly flat and substantial turnaround work still needed in that key geography, creating risk that a lack of traction in the world's largest addressable market may limit revenue growth and margin expansion.
  
• The move from pay-as-you-go to multi-year subscription agreements requires customer behavioral change and potentially seeding pricing or offering concessions, raising the risk that margin uplift may be offset by the need to lower prices or increase incentive spending, diluting profitability and negatively impacting net margins.
  
• Sunsetting legacy products, requiring customers to move to new platforms, and consolidating systems poses a risk of increased customer churn or procurement challenges, and while management downplays this, the complexity of migration could lead to revenue volatility and increased attrition.
  
• Competitive dynamics in the U.S. and globally remain intense and fragmented, with several players reportedly growing far faster than GB Group in core identity and fraud markets, so sustained underperformance on innovation, differentiated value, or go-to-market execution could further erode pricing power and net revenue retention, ultimately constraining both top-line growth and future earnings.

Valuation

• The assumed bearish price target for GB Group is £2.65, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of GB 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 £4.9, and the most bearish reporting a price target of just £2.65.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £313.8 million, earnings will come to £21.2 million, and it would be trading on a PE ratio of 39.8x, assuming you use a discount rate of 9.1%.
• Given the current share price of £2.25, the bearish analyst price target of £2.65 is 15.1% 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.