AI-driven SaaS Expansion Into Europe May Boost Future Earnings, But Volatility Remains A Concern

Key Takeaways

• Expansion into less penetrated European markets and terminating low-margin contracts may drive future revenue and improve net margins.
  
• Adoption of advanced AI solutions and a strong M&A pipeline could boost future earnings and align with historical performance.
  
• LINK’s focus on profitability over growth introduces revenue volatility, with financial uncertainty from terminated contracts, price disputes, and potential M&A integration risks.

Catalysts

Provides mobile and communication-platform-as-a-service solutions.

• LINK Mobility is leveraging its experience in advanced Nordic messaging markets to expand in less penetrated European markets, which could drive future revenue growth and improve earnings.
  
• The company is terminating low-margin aggregator contracts in favor of higher-margin enterprise solutions, potentially boosting future net margins and gross profit growth.
  
• LINK is enhancing its SaaS solutions with AI content creation and marketing automation, which may lead to increased revenue from higher-margin advanced products.
  
• The adoption of RCS in iOS is expected to drive significant growth in mobile marketing, potentially improving future revenue and net margins.
  
• A solid M&A pipeline focused on accretive targets could enhance future revenue and EBITDA, driving earnings growth in line with LINK's historical performance.

LINK Mobility Group Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LINK Mobility Group Holding's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.6% today to 3.4% in 3 years time.
• Analysts expect earnings to reach NOK 310.4 million (and earnings per share of NOK 1.04) by about February 2028, down from NOK 388.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK416 million in earnings, and the most bearish expecting NOK244 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.2x on those 2028 earnings, up from 16.5x today. This future PE is lower than the current PE for the NO Software industry at 43.2x.
• Analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

LINK Mobility Group Holding Future Earnings Per Share Growth

Risks

• LINK's decision to terminate low-margin clients and refocus on profitability over revenue growth in Global Messaging introduces revenue volatility and could dampen overall revenue growth in the short term. This shift could impact future revenue projections and gross profit margins.
  
• Churn and the associated revenue instability, particularly noted in a significant client bankruptcy in Western Europe, may undermine net margins and lead to unpredictable earnings outcomes.
  
• Disputed price increases with operators, particularly the case in Italy, cause cost of goods sold (COGS) accruals and introduce financial uncertainty that can affect net earnings and operating margins until resolved.
  
• Global Messaging volatility, stemming from terminated contracts and associated credit risk, suggests a risk of persistent revenue turnover and the potential for profitability fluctuations that can affect overall earnings stability.
  
• LINK’s inorganic growth strategy via M&A could be financially strained if cash reserves and leverage become unfavorable, impacting net earnings and potentially leading to integration risks and the pressure for overvaluation corrections.

Valuation

• The analysts have a consensus price target of NOK31.667 for LINK Mobility Group Holding 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 NOK35.0, and the most bearish reporting a price target of just NOK30.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK9.2 billion, earnings will come to NOK310.4 million, and it would be trading on a PE ratio of 37.2x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of NOK22.75, the analyst price target of NOK31.67 is 28.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.