Retail Digitalization And AI Adoption Will Drive Long Term Competitive Advantage

Catalysts

About Vertiseit

Vertiseit provides an in-store experience management platform that helps leading retailers and brands orchestrate digital touchpoints and customer journeys in physical locations.

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

• Ongoing digitalization of physical retail and the rapid build out of retail media networks, exemplified by large framework agreements such as Salling Group and In store Media, are expected to expand high margin license volumes over multiple years and support sustained ARR and revenue growth.
• A structural shift toward a higher share of SaaS versus hardware and consulting, with more implementation work pushed to partners, is likely to improve the gross margin mix and drive higher EBITDA and cash conversion over time.
• Proven roll up capabilities, including materially shorter integration times for acquisitions such as MDT compared with earlier deals, increase the feasibility of executing on an agenda of 2 to 4 deals per year and can accelerate ARR scale and earnings per share growth.
• The embedding of AI in both internal processes and customer facing products, as well as advising retailers on AI driven personalization, is expected to enhance operational efficiency and enable value added features that support pricing power, net revenue retention and net margin expansion.
• Low churn and strong net revenue retention from blue chip customers such as Deutsche Telekom, McDonald’s and KFC, combined with rising activity after a weak investment period, provide a resilient base that can amplify operating leverage as new deals convert to recurring revenue and earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Vertiseit's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.6% today to 15.4% in 3 years time.
• Analysts expect earnings to reach SEK 131.7 million (and earnings per share of SEK 3.88) by about December 2028, up from SEK 11.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, down from 168.0x today. This future PE is lower than the current PE for the SE Software industry at 26.4x.
• Analysts expect the number of shares outstanding to grow by 4.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The recent slowdown in organic ARR growth to around 11 percent annualized and softer system sales and consulting could signal that demand for in store digitalization is more cyclical than expected. This would pressure long term revenue growth and limit operating leverage.
• The strategy to shift more work to partners and reduce reliance on hardware and consulting may dilute Vertiseit’s control over customer relationships and execution quality. This could increase churn risk and potentially cap gross margin expansion and future EBITDA growth.
• The roll up agenda targeting 2 to 4 acquisitions per year increases exposure to integration risk and overpayment in a competitive market for software assets. This could lead to weaker returns on invested capital, lower earnings growth and impaired cash generation if synergies do not materialize.
• Dependence on a growing retail media trend and large framework agreements like Salling Group and In store Media concentrates risk in a few big initiatives. Any slowdown in retailer ad spend or delays in rollouts would directly hit ARR growth and push out net margin expansion.

Valuation

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

• The analysts have a consensus price target of SEK68.17 for Vertiseit 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 SEK76.0, and the most bearish reporting a price target of just SEK62.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be SEK855.2 million, earnings will come to SEK131.7 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of SEK61.0, the analyst price target of SEK68.17 is 10.5% 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.