Realize Platform And AI Will Expand Advertising Horizons

Key Takeaways

• Expansion into the broader performance advertising market and partnerships with major advertisers could drive revenue growth through increased client demand and effective use of AI.
  
• Financial flexibility from cash flow growth and share buyback expansion signals effective cost management and confidence, positively impacting margins and shareholder returns.
  
• Taboola.com's growth ambitions face challenges due to reliance on native advertising, competitive pressures, and execution risks associated with strategic pivots beyond native advertising.

Catalysts

Operates an artificial intelligence-based algorithmic engine platform in Israel, the United States, the United Kingdom, Germany, and internationally.

• Taboola's expansion from native advertising into a broader performance advertising market with the launch of their Realize platform, is expected to capture a $55 billion opportunity by leveraging their first-party data and AI, potentially driving revenue growth.
  
• The company's ability to integrate Yahoo and onboard major enterprise advertisers like Samsung, Citi, and Verizon indicates an expanded clientele, which could enhance their demand generation and thus positively impact future revenue streams.
  
• Investments in AI technologies, such as the new predictive audiences targeting and generative AI tools, are expected to improve performance for advertisers, which can increase efficiency and net margins over the long term.
  
• A significant increase in free cash flow to $149 million, exceeding their target by 49%, provides financial flexibility and indicates effective cost management, which can lead to improvements in net margins.
  
• The $200 million expansion of their share buyback program reflects management's confidence in the company's valuation and aims to enhance shareholder returns, potentially positively affecting earnings per share (EPS).

Taboola.com Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Taboola.com's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.2% today to 1.7% in 3 years time.
• Analysts expect earnings to reach $37.6 million (and earnings per share of $0.1) by about April 2028, up from $-3.8 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 45.6x on those 2028 earnings, up from -264.8x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 17.2x.
• Analysts expect the number of shares outstanding to grow by 0.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.83%, as per the Simply Wall St company report.

Taboola.com Future Earnings Per Share Growth

Risks

• The projected single-digit growth for 2025 is below historical rates and long-term ambitions, which could negatively impact revenue projections if double-digit growth isn't achieved as planned.
  
• The realization that native advertising alone isn't large enough to fuel expected ambitious growth could mean a shift in strategy that may not immediately yield the desired impact on revenue and profitability.
  
• The new Realize platform aims to expand beyond native advertising, but this move could face significant competitive challenges from established players, potentially impacting market share and revenue growth.
  
• Advertisers absorbed from Yahoo are spending significantly less on native ads outside Yahoo's platform, suggesting potential risks in scaling advertising demand, which could adversely affect future revenues.
  
• The assumption that a pivot beyond native advertising will open new revenue streams entails execution risks, including integration and market adoption challenges, that could impact earnings and net margins if not successfully managed.

Valuation

• The analysts have a consensus price target of $3.96 for Taboola.com 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 $4.5, and the most bearish reporting a price target of just $3.34.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.2 billion, earnings will come to $37.6 million, and it would be trading on a PE ratio of 45.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $2.96, the analyst price target of $3.96 is 25.3% 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.