New AI Tools Like DeepSeek Will Improve Sales Efficiency And Conversion Rates

Key Takeaways

• Waterdrop's AI innovation and investment aim to improve sales efficiency, reduce costs, and drive future revenue growth.
  
• Strategic expansions in customer acquisition and inclusive insurance products are set to enhance profitability and shareholder returns.
  
• Heavy reliance on AI and tech may raise costs, while declining insurance revenues, competition, and regulatory risks threaten growth and net margins.

Catalysts

Through its subsidiaries, provides online insurance brokerage services to match and connect users with related insurance products underwritten by insurance companies in the People’s Republic of China.

• Waterdrop's focus on AI innovation, including the integration of AI tools like DeepSeek and advancements in machine learning algorithms, is expected to improve sales efficiency and conversion rates, likely contributing to revenue growth.
  
• The company's plan to increase AI investment in 2025 aims to strengthen its technology edge, potentially leading to enhanced operational efficiencies that could positively impact net margins.
  
• Waterdrop's strategic expansion in customer acquisition and the introduction of more inclusive short-term insurance products are anticipated to drive future revenue growth.
  
• The launch of AI-driven solutions, such as the AI insurance agent and co-pilot applications, is designed to significantly reduce costs and improve service quality, which is expected to enhance overall profitability and earnings.
  
• Waterdrop's ongoing share repurchase program and commitment to semiannual dividends suggest strong cash flow management and shareholder returns, potentially supporting improved Earnings Per Share (EPS).
  

Waterdrop Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Waterdrop's revenue will grow by 11.9% annually over the next 3 years.
• Analysts are assuming Waterdrop's profit margins will remain the same at 13.3% over the next 3 years.
• Analysts expect earnings to reach CN¥515.3 million (and earnings per share of CN¥1.48) by about April 2028, up from CN¥367.5 million 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 10.8x on those 2028 earnings, up from 9.1x today. This future PE is lower than the current PE for the US Insurance industry at 13.4x.
• Analysts expect the number of shares outstanding to decline by 2.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

Waterdrop Future Earnings Per Share Growth

Risks

• Waterdrop relies heavily on AI and technology for business operations, which necessitates ongoing investment and could lead to increased operating costs. This could impact net margins if AI initiatives do not yield proportional revenue gains.
  
• The insurance business, a significant revenue driver, showed a decline in performance in Q4 with a 7% quarter-on-quarter decrease in FYP and a slight year-on-year revenue decline, indicating potential challenges in sustaining growth and revenues.
  
• Intense competition and the pressure to maintain market share might force Waterdrop to increase marketing expenses, which could negatively impact net profit margins.
  
• The dependency on regulatory approvals and adherence to legislative changes, especially in China, poses a risk that could affect long-term stability and earnings if regulations constrain business operations or lead to higher compliance costs.
  
• Waterdrop's growth strategy includes planned strategic investments, which could lead to increased financial leverage and pressure on cash flow if not accompanied by proportional revenue growth.

Valuation

• The analysts have a consensus price target of $1.794 for Waterdrop 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 $2.19, and the most bearish reporting a price target of just $1.34.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥3.9 billion, earnings will come to CN¥515.3 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 7.0%.
• Given the current share price of $1.24, the analyst price target of $1.79 is 30.9% 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.