AI Tools Like BERAai And MENA Expansion Will Improve Future Performance

Key Takeaways

• Focus on digital transformation and AI projects is expected to drive growth and improve margins over time.
  
• Strong geographic expansion, particularly in MENA, is contributing significantly to global revenue growth.
  
• Investments in AI and new technologies, reliance on M&A, and expansion into government services pose risks to near-term earnings and revenue stability.

Catalysts

Provides digital transformation, performance media and data, consumer insights and strategy, and creativity and communications services.

• The new, larger contracts coming online, especially the expansion of work with major tech companies (up by 30%), suggest significant future revenue growth because these relationships are pivoting back strongly, indicating a positive environment for continued expansion.
  
• Stagwell's focus on digital transformation, particularly with AI applications, is poised to drive future growth. This includes the success of the Code and Theory Network and new AI-driven projects, which are expected to sustain digital transformation revenue and improve margins over time.
  
• The Stagwell Marketing Cloud's 30% year-over-year growth, driven by innovative tools like BERA.ai and Wonder Cave, points to strong future revenue prospects. The successful expansion into non-advocacy brands with these products indicates broad application potential and potentially higher earnings.
  
• Geographic expansion, especially in MENA with acquisitions like Consulum, has already shown substantial revenue growth (128% year-over-year) and is expected to continue at high growth rates, contributing significantly to global revenue streams.
  
• The stock buyback program expansion by $125 million highlights confidence in financial performance and provides a mechanism to enhance EPS by reducing the share count, which often signals undervaluation and future earnings improvement.

Stagwell Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stagwell's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.0% today to 3.3% in 3 years time.
• Analysts expect earnings to reach $105.5 million (and earnings per share of $0.97) by about January 2028, up from $310.0 thousand today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, down from 2343.3x today. This future PE is lower than the current PE for the US Media industry at 14.2x.
• Analysts expect the number of shares outstanding to decline by 25.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

Stagwell Future Earnings Per Share Growth

Risks

• The ongoing investment in AI and new technology solutions, while promising for future growth, requires significant upfront OpEx, which may constrain near-term net margins and earnings if anticipated returns take longer to materialize or don't meet expectations.
  
• Although the company anticipates double-digit growth in the fourth quarter, much of this growth depends on new contracts and projects launching as expected; delays or failures in implementation could result in missed revenue forecasts and negatively impact earnings.
  
• Expanding into government services, while potentially lucrative, may take several years to realize significant revenue given complex procurement processes and competition, impacting short-term revenue growth.
  
• The focus on acquiring businesses and expanding globally, such as in the MENA region, indicates reliance on M&A for growth, which might increase financial risk and complexity, affecting revenue stability and net margins if integration processes prove challenging.
  
• Despite positive developments in digital transformation and Stagwell Marketing Cloud, there is intense competition in these areas, and shifts in client budgets towards more established firms could impact future revenue streams and earnings growth.

Valuation

• The analysts have a consensus price target of $8.66 for Stagwell 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 $6.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $105.5 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $6.32, the analyst's price target of $8.66 is 27.0% 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.