Falling Subscribers And Margin Pressure Will Unlock Value

Key Takeaways

• Stagnant subscriber growth and pressure on pricing power threaten Vimeo's long-term revenue outlook, despite investments in AI features and enterprise solutions.
  
• Heightened competition and vulnerability to macroeconomic shifts increase risks of customer churn and margin compression, potentially delaying meaningful profitability.
  
• Declining subscribers, undifferentiated services, execution risks, macro pressures, and ongoing R&D spend threaten Vimeo's revenue growth, margins, and path to profitability.

Catalysts

Provides video software solutions in the United States and internationally.

• While Vimeo has seen early positive momentum from its AI-powered features and pricing strategies, the company continues to struggle with sustained subscriber growth in its self-serve segment, which could create ongoing headwinds for long-term recurring revenue without a clear return to consistent subscriber expansion.
  
• Despite the company's focus on strengthening enterprise offerings to target large contracts and enhancing security and analytics, increased commoditization of video bandwidth and hosting limits Vimeo's pricing power and may cap average revenue per user growth, putting pressure on overall revenue potential over time.
  
• Although digital transformation and the proliferation of video in enterprise workflows represent significant tailwinds, Vimeo's significant exposure to SMB customers leaves it vulnerable to shifts in macroeconomic conditions and reductions in business spending, heightening the risk of revenue volatility and increased customer churn during downturns.
  
• While Vimeo's investments in AI and integrations with leading SaaS platforms can increase stickiness, rising competition from large tech companies offering bundled video solutions threatens Vimeo's ability to retain market share and maintain premium pricing, which could compress margins and limit long-term earnings.
  
• Even as the company improves its efficiency and raises EBITDA guidance, the need for ongoing R&D investments to keep pace with rapid technological change could delay a meaningful expansion in net margins, especially if customer acquisition costs rise due to industry consolidation and competitive dynamics.

Vimeo Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Vimeo compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Vimeo's revenue will grow by 4.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.1% today to 6.4% in 3 years time.
• The bearish analysts expect earnings to reach $30.0 million (and earnings per share of $0.18) by about August 2028, up from $12.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 37.4x on those 2028 earnings, down from 49.9x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.5x.
• Analysts expect the number of shares outstanding to decline by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

Vimeo Future Earnings Per Share Growth

Risks

• Vimeo's self-serve subscriber base is still declining, with recent growth primarily driven by pricing and packaging changes rather than increases in new or returning customers, raising concerns about the sustainability of revenue growth if user numbers do not stabilize.
  
• The commoditization of bandwidth and certain video hosting services, as highlighted by the loss of an enterprise customer who viewed Vimeo mainly as a bandwidth provider, suggests increasing price competition and margin pressure for undifferentiated features, which could negatively impact gross margins and recurring revenue.
  
• Management repeatedly cites execution risk around transitioning enterprise customers from basic offerings to higher-value features, with past failures to do so leading to customer churn; inability to expand customer relationships or cross-sell could limit top-line growth and average revenue per user.
  
• Macro uncertainties such as tariffs, weak performance in certain geographies and sectors (like healthcare and education), and overall economic volatility may pressure enterprise and SMB budgets, which in turn can hamper bookings and revenue growth, especially given Vimeo's exposure to these segments.
  
• Although the company touts its innovation and pace of AI product rollouts, the necessity for continual high levels of R&D investment to keep up with fast-moving competitors and evolving technology could constrain operating margins and delay the achievement of sustainable net profitability.

Valuation

• The assumed bearish price target for Vimeo is $5.4, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Vimeo's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $5.4.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $472.1 million, earnings will come to $30.0 million, and it would be trading on a PE ratio of 37.4x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $3.89, the bearish analyst price target of $5.4 is 28.0% 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.