Will Expand Market Presence Through Doro Acquisition And HMD Partnership

Key Takeaways

• Emphasizing subscription growth and strategic acquisitions is expected to enhance revenue and market reach.
  
• Expansion efforts into new markets and cost-effective products aim to drive revenue and improve profitability.
  
• Increased competition and challenges in scaling international partnerships, coupled with reliance on bundling strategies, pose significant risks to revenue and margins.

Catalysts

An information technology company, develops wearable smart devices and services for kids and families in Norway and internationally.

• Xplora Technologies is targeting a significant increase in service revenue, emphasizing subscription growth over unit sales, which is anticipated to impact revenue positively.
  
• The acquisition of Doro is expected to broaden market reach and enhance earnings, particularly through the integration of Xplora's SIM cards into Doro's product line, which already enjoys a 50% hardware gross margin.
  
• Expansion into new geographical markets, including a significant presence in Germany, is poised to drive revenue growth as international service revenue already increased to 17% in Q4.
  
• The launch of a competitive, lower-cost youth product in partnership with HMD is expected to capture a new demographic, potentially boosting revenue and improving net margins through more cost-effective production.
  
• The strategic focus on reducing operating expenses relative to revenue, as demonstrated by a decrease in OpEx to revenue ratio by 2 percentage points, is likely to improve net margins and overall profitability.

Xplora Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Xplora Technologies's revenue will grow by 14.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.7% today to 7.4% in 3 years time.
• Analysts expect earnings to reach NOK 91.0 million (and earnings per share of NOK 2.07) by about March 2028, up from NOK -5.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, up from -206.8x today. This future PE is lower than the current PE for the NO Electronic industry at 31.3x.
• 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 7.29%, as per the Simply Wall St company report.

Xplora Technologies Future Earnings Per Share Growth

Risks

• The company faces increased competition in the U.S. market, specifically from a company that is offering its products for free. This could impact revenue growth and market share in that region.
  
• While the company mentions substantial growth in service revenue, there are challenges in scaling partnerships, particularly in South Korea and China, which may affect future revenue streams.
  
• The focus on bundling and subscription models, while a strength, could expose the company to risks if consumer preferences shift, potentially affecting recurring revenue models.
  
• The company’s acquisition strategy, such as the integration of Doro, while expected to provide growth, carries risks if market expectations or technological integrations are not met, potentially impacting earnings.
  
• Although confident of maintaining high margins due to previously negotiated telco costs, any unforeseen changes in these agreements or in the economic environment could negatively affect EBITDA and net margins.

Valuation

• The analysts have a consensus price target of NOK32.5 for Xplora Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK1.2 billion, earnings will come to NOK91.0 million, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 7.3%.
• Given the current share price of NOK27.8, the analyst price target of NOK32.5 is 14.5% 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.