Teads Will Harness AI To Deliver Superior Advertising Results

Key Takeaways

• Merging with Teads creates a major open Internet player, boosting revenue growth and profitability through strategic synergies and expanded offerings.
  
• Emphasis on video solutions and connected TV segment growth could enhance revenue and ad effectiveness through AI-driven strategies.
  
• Exposure to digital advertising competition, political instability, and integration challenges could impact Outbrain's growth, revenue consistency, and financial flexibility.

Catalysts

Operates a technology platform that connects media owners and advertisers with engaged audiences to drive business outcomes worldwide.

• The merger of Outbrain and Teads is expected to create one of the largest players on the open Internet, increasing ex TAC revenue by 2.5x and EBITDA by 6x by 2026, which should drive significant revenue growth and profitability improvements.
  
• By combining their platforms and product offerings, the new company anticipates significant cross-selling opportunities, especially selling Teads' video solutions to Outbrain's performance marketing clientele, which could enhance revenue growth over time.
  
• The transaction includes detailed strategic and tactical execution plans developed during the 6-month regulatory clearance period, leading to immediate operational synergies like head count reductions and G&A overlap, thereby improving net margins.
  
• Leveraging the expansive omnichannel graph and data assets, the new Teads plans to deliver better advertising outcomes through artificial intelligence and machine learning, which could drive higher earnings by maximizing ad effectiveness.
  
• Significant growth in the connected TV segment, with proprietary solutions and a 3x revenue growth projection from 2023 to 2024, indicates a strong catalyst for increasing overall revenue and average campaign size.

Outbrain Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Outbrain's revenue will grow by 31.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 13.1% in 3 years time.
• Analysts expect earnings to reach $268.0 million (and earnings per share of $2.7) by about February 2028, up from $3.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.7x on those 2028 earnings, down from 185.8x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 1.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.32%, as per the Simply Wall St company report.

Outbrain Future Earnings Per Share Growth

Risks

• The softness in Teads' Q4 performance, particularly in the U.S. market, may indicate potential challenges with sales execution and employee turnover, impacting near-term revenue growth.
  
• Political instability in key markets such as France has led to deferral of advertising spend, which could unpredictably affect revenue consistency.
  
• Outbrain's significant exposure to the rapidly changing digital advertising landscape may lead to increased competitive pressures, potentially influencing their long-term revenue growth.
  
• The integration of Outbrain and Teads involves complex technical and strategic challenges, which could delay expected synergies, impacting projected net margins and EBITDA growth.
  
• The need to maintain lower leverage ratios and manage debt post-acquisition could strain financial flexibility, possibly affecting investment in future growth opportunities and impacting earnings stability.

Valuation

• The analysts have a consensus price target of $8.2 for Outbrain 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 $10.0, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $268.0 million, and it would be trading on a PE ratio of 3.7x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $6.99, the analyst price target of $8.2 is 14.8% 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.