Robust Enterprise Growth And AI Investments Paint A Mixed Picture Amid Analysts' Cautious Outlook

Key Takeaways

• Expanding Vimeo Enterprise and introducing AI improvements suggest a strategic focus on enhancing enterprise solutions and user experience to drive revenue growth.
  
• Investment in growth opportunities and an active share buyback program indicate confidence in long-term value and a focus on shareholder value enhancement.
  
• Vimeo's investment focus over shareholder returns and risky AI monetization strategy may hurt earnings and competitive stance if new segments don't meet growth expectations.

Catalysts

Provides video software solutions worldwide.

• Expanding Vimeo Enterprise with significant revenue growth (55% in Q2) and the acquisition of major clients indicates a strong growth trajectory in enterprise video solutions, likely increasing revenue and margins through larger deals and multi-year contracts.
  
• Introduction of AI and automation improvements in the Self-Serve segment, focusing on easing creators' workflows, suggests potential for revenue growth by enhancing user experience and retention.
  
• Significant focus on increasing Average Order Value (AOV) in Vimeo Enterprise through the acquisition of larger customers and deepening relationships with existing ones, pointing towards higher revenue per user and improved profit margins.
  
• Investment in growth opportunities across both enterprise and self-serve platforms, leveraging a strong financial foundation, suggests a strategic allocation of resources towards areas with the highest growth potential, aiming to boost overall revenue and market share.
  
• Active share buyback program reflects management's confidence in the company's value proposition, aiming to enhance shareholder value and signal financial health, potentially leading to earnings per share (EPS) growth.

Assumptions

• Analysts are assuming Vimeo's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.7% today to 6.2% in 3 years time.
• Analysts expect earnings to reach $28.3 million (and earnings per share of $0.16) by about October 2027, down from $32.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $32.6 million in earnings, and the most bearish expecting $11.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.5x on those 2027 earnings, up from 25.6x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 25.1x.
• Analysts expect the number of shares outstanding to decline by 0.66% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.88%, as per the Simply Wall St company report.

Risks

• The significant reduction in paid marketing spend for the self-serve business might limit its ability to attract new customers, potentially affecting revenue growth in a segment already experiencing a decline.
  
• Reliance on achieving future growth through investments in enterprise and self-service segments may strain operating margins if these investments do not yield the expected revenue growth.
  
• The flat quarter-over-quarter subscription growth in Vimeo Enterprise could signal market saturation or competitive pressures, which may hinder future revenue growth in this segment.
  
• Vimeo's strategy to prioritize investment in growth over returning capital to shareholders through means like stock repurchases may not be favorable if the investments do not lead to proportional increases in shareholder value, impacting earnings per share.
  
• The focus on being a trusted platform for video content in the era of generative AI poses both an opportunity and a risk, as the failure to effectively monetize AI technologies could limit revenue growth opportunities or erode competitive advantage, impacting net margins.

Valuation

• The analysts have a consensus price target of $5.5 for Vimeo 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 $7.0, and the most bearish reporting a price target of just $4.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $454.8 million, earnings will come to $28.3 million, and it would be trading on a PE ratio of 38.5x, assuming you use a discount rate of 6.9%.
• Given the current share price of $5.0, the analyst's price target of $5.5 is 9.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.