Focusing On Current Markets Will Increase Shopping Frequency And Customer Loyalty

Key Takeaways

• Focus on high-margin advertising and Allegro Pay growth to boost EBITDA margins and future earnings through increased purchasing power.
  
• Strategic logistic investments and marketplace integration aim to improve margins and earnings, with a shift towards enhancing loyalty in current markets.
  
• CEO transition, competitive threats, paused international expansion, and rising costs pose risks to Allegro’s revenue growth, market confidence, and profitability.

Catalysts

Operates a go-to commerce platform for consumers in Poland and internationally.

• Allegro’s increasing focus on high-margin advertising revenue, growing at 31.3% year-on-year, is expected to significantly boost EBITDA margins moving forward as this stream directly flows into profitability.
  
• The expansion of Allegro Pay, with a loan origination growth of 41% over the past two years, is set to enhance GMV, driving future earnings through increased purchasing power and consumer engagement on the platform.
  
• Investments in logistic capabilities, such as the cost-effective Allegro Delivery network, are anticipated to reduce delivery expenses and improve net margins in the medium to long term.
  
• Successful integration of new international marketplaces with identical tech stacks implies potential operational efficiencies and revenue gains, underpinning earnings growth in new markets.
  
• Pause in international expansion allows for strategic focus on enhancing shopping frequency and customer loyalty in current markets, which is likely to drive consistent GMV growth and stabilize margins.

Allegro.eu Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allegro.eu's revenue will grow by 10.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.6% today to 16.0% in 3 years time.
• Analysts expect earnings to reach PLN 2.4 billion (and earnings per share of PLN 2.3) by about April 2028, up from PLN 1.0 billion 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 22.1x on those 2028 earnings, down from 31.4x today. This future PE is lower than the current PE for the PL Multiline Retail industry at 32.1x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.47%, as per the Simply Wall St company report.

Allegro.eu Future Earnings Per Share Growth

Risks

• The impending CEO transition in June 2024 may cause potential leadership instability, which could affect strategic decisions impacting revenue growth and market confidence.
  
• The competitive threat from entrants like TEMU could lead to increased marketing expenses and price pressure, impacting Allegro’s net margins.
  
• The company's decision to pause international expansion suggests challenges in those markets, which could slow anticipated revenue scaling and GMV growth.
  
• Allegro’s increased CapEx on logistics to reduce delivery costs has the potential risk of not achieving anticipated savings, impacting EBITDA margins.
  
• Potential cost pressures, including rising real wages and software costs, may not be fully offset by increases in take rates, thus affecting future earnings and profitability.

Valuation

• The analysts have a consensus price target of PLN37.927 for Allegro.eu 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 PLN47.0, and the most bearish reporting a price target of just PLN30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be PLN14.7 billion, earnings will come to PLN2.4 billion, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 9.5%.
• Given the current share price of PLN30.88, the analyst price target of PLN37.93 is 18.6% 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.