Overreliance On Key Partnerships Will Constrain Margins And Limit Earnings Improvement

Catalysts

About Serko

Serko provides corporate travel and expense management software, including powering Booking.com for Business and the GetThere platform.

What are the underlying business or industry changes driving this perspective?

• Reliance on Booking.com for Business volume growth in small and medium European customers is exposed to ongoing macroeconomic headwinds. If booking frequency per active customer continues to soften rather than recover, revenue growth could slow while fixed platform costs remain high, weighing on earnings.
• The shift of Sabre away from direct corporate contracts toward travel management company relationships, combined with Serko missing its initial U.S. sales targets, raises the risk that expected North American scale takes much longer to materialize. This could leave elevated U.S. market spend and GetThere related costs pressuring net margins.
• As completed room nights move further into lower commission tiers under the Booking.com partnership, average commission per room night may trend down while Serko continues to invest heavily in AI and platform acceleration. This could compress incremental gross margin and limit operating leverage in earnings.
• Heavy reliance on air and hotel distribution changes such as NDC adoption, which is still building from a low base, may mean that expected uplift in Australasian revenue per booking and U.S. content related income arrives slower than the associated integration and tech spend. This could dampen revenue growth relative to total spend.
• The plan to reallocate around 60 roles and reinvest savings into AI and data capabilities introduces execution and timing risk. If new AI powered products do not gain traction with Fortune 500 and mid market clients as intended, Serko could see higher ongoing R&D and platform costs without a matching lift in revenue or long term net margins.

Assumptions

This narrative explores a more pessimistic perspective on Serko compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Serko's revenue will grow by 13.6% annually over the next 3 years.
• The bearish analysts are not forecasting that Serko will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Serko's profit margin will increase from -24.4% to the average NZ Software industry of 8.2% in 3 years.
• If Serko's profit margin were to converge on the industry average, you could expect earnings to reach NZ$13.0 million (and earnings per share of NZ$0.1) by about January 2029, up from NZ$-26.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$36.3 million in earnings, and the most bearish expecting NZ$-5.8 million.
• 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 33.5x on those 2029 earnings, up from -14.6x today. This future PE is greater than the current PE for the NZ Software industry at 24.7x.
• The bearish analysts expect the number of shares outstanding to grow by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Serko reports its strongest half year total income of $61.8 million with 45% growth and positive EBITDAFI of $6.1 million plus free cash flow of $3 million, and if this pattern of higher income relative to total spend persists, the market may place more weight on improving earnings quality than on past losses, which could support revenue and net margins.
• The Booking.com for Business partnership is described as having delivered a strong trajectory, with completed room nights up 32% to 2.1 million and active customers up 40% driven by better onboarding and engagement, and if this large and growing customer base keeps scaling, the recurring volume effect may support revenue and earnings even if booking frequency per customer softens at times.
• GetThere is fully integrated with churn on key accounts around 1% of annualised revenue and revenue in the half above internal expectations, and if Serko continues to retain these large corporates while building a pipeline with Fortune 500 customers and TMC resellers, the enlarged U.S. presence could underpin longer term revenue and operating leverage, benefiting net margins.
• Management highlights a strong balance sheet with $65 million of cash, no debt and positive free cash flow, and if that cash position continues to fund platform and AI investment without material equity issuance or leverage, the ability to invest for growth without balance sheet stress may support long term earnings and reduce risk to net margins.
• Serko is rolling out AI powered product capabilities, embedding AI coding tools across engineering and reallocating around 60 roles to free an estimated $12 million of annualised savings for reinvestment, and if these changes lead to faster product delivery and structurally lower unit costs, the result could be higher gross margin and expanding net margins over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Serko is NZ$2.71, which represents up to two standard deviations below the consensus price target of NZ$3.69. This valuation is based on what can be assumed as the expectations of Serko'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 NZ$4.55, and the most bearish reporting a price target of just NZ$2.71.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be NZ$158.4 million, earnings will come to NZ$13.0 million, and it would be trading on a PE ratio of 33.5x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of NZ$3.12, the analyst price target of NZ$2.71 is 15.1% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.