Subscription Model And AI Integration Will Drive Operational Efficiency

Key Takeaways

• Transitioning to a subscription-based model and AI innovation enhances revenue stability and competitive edge, supporting growth and improving net margins.
  
• Strategic agreements and efficiency plans offer market expansion opportunities and cost savings, boosting EBITDA margins and potential shareholder value.
  
• Frequent divestitures and strategic disposals may impede revenue growth and profitability, compounded by flat organic revenue growth, high restructuring costs, and foreign exchange volatility.

Catalysts

Operates as an information services provider in the Americas, the Middle East, Africa, Europe, and the Asia Pacific.

• Clarivate is undergoing a transformation to optimize revenue and improve sales execution, notably by shifting to a subscription-centric model, which is expected to increase recurring revenue and positively impact revenue stability and predictability.
  
• Significant improvements in product innovation, including the incorporation of AI features, are creating competitive advantages that facilitate new customer acquisition and retention, ultimately supporting revenue growth and potentially improving net margins due to higher-value offerings.
  
• Clarivate's Value Creation Plan is leading to improved cost efficiencies, contributing to an increase in adjusted EBITDA margins, which suggests potential for better net margins and stronger earnings.
  
• Strategic wins and multiyear agreements, such as new deals in developing markets and the expansion of long-term customer relationships, indicate opportunities for market expansion and revenue growth.
  
• The company is evaluating strategic alternatives to unlock shareholder value, including potential divestitures or sales, which could lead to one-time earnings boosts or longer-term value creation through focused investments.

Clarivate Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Clarivate's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -26.8% today to 0.7% in 3 years time.
• Analysts expect earnings to reach $17.0 million (and earnings per share of $0.02) by about May 2028, up from $-678.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $30.2 million in earnings, and the most bearish expecting $-62.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 241.1x on those 2028 earnings, up from -4.3x today. This future PE is greater than the current PE for the US Professional Services industry at 23.5x.
• Analysts expect the number of shares outstanding to decline by 5.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.5%, as per the Simply Wall St company report.

Clarivate Future Earnings Per Share Growth

Risks

• The company has undergone numerous divestitures and strategic disposals, which have reduced revenue by approximately $140 million. This could continue to affect overall revenue growth and profitability until operations stabilize under the new strategic direction.
  
• The organic recurring revenue growth remains flat at best, and transactional revenue is expected to decline, reflecting potential challenges in achieving significant revenue growth in the near term.
  
• Restructuring expenses related to the Value Creation Plan have contributed to a net loss in the first quarter. High restructuring costs can reduce net margins and delay improvement in earnings.
  
• The potential impact of U.S. government funding cuts on A&G revenue, although currently contained, presents a risk of decreased revenue if funding conditions worsen.
  
• Foreign currency exchange volatility is expected to pose a translational headwind impacting both revenue and profits, potentially affecting net margins and earnings.

Valuation

• The analysts have a consensus price target of $5.306 for Clarivate 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 $7.0, and the most bearish reporting a price target of just $4.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $17.0 million, and it would be trading on a PE ratio of 241.1x, assuming you use a discount rate of 10.5%.
• Given the current share price of $4.3, the analyst price target of $5.31 is 19.0% 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.