ABEMA's Media Growth, AI Advancements, And Gaming Hits Drive Profit Surge

Key Takeaways

• Investments in AI and ABEMA initiatives may boost revenue, profitability, and operational margins long-term.
  
• New gaming collaborations and IP development strategies suggest potential for continued sales and earnings growth.
  
• CyberAgent faces revenue volatility due to volatile gaming profits, heavy investments, and reliance on major events, risking short-term profit margins and long-term stability.

Catalysts

Engages in the media, internet advertising, game, and investment development businesses primarily in Japan.

• CyberAgent’s Media business, including ABEMA, has shown strong growth in sales and is expected to start booking operating profits from FY 2025 onwards, likely impacting revenue and net margins positively.
  
• The company’s strategy of investing in AI technology for its Internet advertising business is beginning to pay off, which may lead to increased advertising effectiveness and stabilization in revenue and net margins.
  
• In the gaming sector, the release of new titles and successful collaborations, such as with Uma Musume and Chiikawa, suggest potential future revenue growth and increased profitability.
  
• The introduction of a premium plan and price revisions within ABEMA is projected to enhance profitability by improving operating margins.
  
• The mid to long-term strategy of focusing on IP creation and development, including anime and films, could contribute to sustained sales growth and strengthen earnings potential over time.

CyberAgent Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CyberAgent's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 3.2% in 3 years time.
• Analysts expect earnings to reach ¥30.0 billion (and earnings per share of ¥59.24) by about January 2028, up from ¥16.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥35.8 billion in earnings, and the most bearish expecting ¥26.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.6x on those 2028 earnings, down from 34.2x today. This future PE is greater than the current PE for the JP Media industry at 13.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.94%, as per the Simply Wall St company report.

CyberAgent Future Earnings Per Share Growth

Risks

• The rapid decline in game revenues after the initial success of hits like Uma Musume suggests a high-risk profile for revenue stability in the gaming segment. This volatility can impact CyberAgent’s overall earnings and profit margins.
  
• Ongoing significant investments in technology and AI for the advertising business, while necessary for growth, could strain operating margins in the short term if the returns on these investments do not materialize as quickly as anticipated.
  
• Though the media business is projected to become profitable, past operating losses and reliance on diverse content quality improvements introduce risks to achieving sustainable net income growth.
  
• Dependence on major events, such as the World Cup, to drive significant increases in user engagement for platforms like ABEMA implies revenue volatility tied to external factors and seasonal content peaks.
  
• The commitment to developing new IP and content, such as animes and films, involves high upfront costs and risks in successful market reception, which could challenge profitability if the creations do not achieve anticipated popularity and sales growth.

Valuation

• The analysts have a consensus price target of ¥1161.33 for CyberAgent 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 ¥1400.0, and the most bearish reporting a price target of just ¥1000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥941.6 billion, earnings will come to ¥30.0 billion, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 4.9%.
• Given the current share price of ¥1096.0, the analyst's price target of ¥1161.33 is 5.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.