Richer Conversational Channels Will Pressure Margins And Limit Long-Term Earnings Potential

Catalysts

About Sinch

Sinch provides cloud communications and messaging infrastructure that powers enterprise customer engagement across channels such as SMS, e-mail, voice and conversational apps.

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

• As richer conversational channels like RCS and WhatsApp scale globally and autonomous AI agents drive incremental message volumes, Sinch may be forced into sustained price concessions to defend share in core messaging. This could compress gross margins and limit future earnings growth.
• The rapid adoption of AI enabled customer engagement could accelerate the shift of large enterprises toward in-house or vertically integrated solutions. This may erode Sinch's role as an independent execution layer and cap long term revenue expansion.
• Competitive intensity in key growth markets such as India and the Americas, including carrier and local player encroachment into enterprise messaging, risks turning structurally higher traffic into structurally lower unit economics. This could constrain net sales and gross profit growth.
• Heavy ongoing investment needs in network modernization, AI capabilities and product development to keep pace with global CPaaS peers may outstrip Sinch's ability to offset costs with mix improvements, pressuring net margins even if the top line grows.
• Customer diversification into smaller and mid sized enterprises and self serve channels, while strategically attractive, could extend sales cycles for new AI and conversational offerings. This may delay the revenue ramp needed to justify current valuation and put near to mid term EBITDA growth at risk.

Assumptions

This narrative explores a more pessimistic perspective on Sinch 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 Sinch's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.3% today to 4.3% in 3 years time.
• The bearish analysts expect earnings to reach SEK 1.2 billion (and earnings per share of SEK 1.44) by about December 2028, up from SEK -357.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK2.2 billion.
• 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 17.0x on those 2028 earnings, up from -68.5x today. This future PE is lower than the current PE for the GB Software industry at 26.4x.
• The bearish analysts expect the number of shares outstanding to decline by 1.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sinch is already delivering steady organic gross profit growth of 5% alongside record adjusted EBITDA margins of 14% and disciplined cost control. If this combination of margin expansion and operating leverage persists, earnings could compound faster than expected and support a higher share price through improved net margins and EBITDA.
• Structural growth in richer channels like RCS, WhatsApp and e-mail is evident in tripling RCS traffic, nearly 40% higher e-mail volumes and strong self serve momentum. Sustained mix shift toward higher value interactions could reaccelerate top line and lift gross margins, which would underpin stronger revenue and gross profit growth.
• Sinch is positioning itself as a foundational communications layer for the AI economy, with leading AI innovators choosing its APIs and AI embedded across products. If autonomous AI agents and intelligent conversational use cases scale as management anticipates, incremental traffic could materially boost long term revenue and earnings.
• Customer concentration risk is being actively reduced as large enterprise accounts grow 5% year to date and self serve customers exceed 190,000. A broader, more diversified base could stabilize volumes and pricing power, supporting more resilient revenue and gross profit over time.
• The balance sheet remains strong with net debt to adjusted EBITDA of 1.4 times, solid cash conversion around the guided range and access to unused credit facilities. Continued cash generation combined with share buybacks and potential value accretive M&A could enhance per share earnings and support the equity value through improved earnings per share.

Valuation

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

• The assumed bearish price target for Sinch is SEK21.5, which represents up to two standard deviations below the consensus price target of SEK36.0. This valuation is based on what can be assumed as the expectations of Sinch'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 SEK46.0, and the most bearish reporting a price target of just SEK21.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be SEK28.7 billion, earnings will come to SEK1.2 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of SEK30.48, the analyst price target of SEK21.5 is 41.8% 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.