Restructuring Will Improve Future Prospects For CNET And PCMag

Key Takeaways

• Restructuring into five segments aims to increase investor confidence, potentially boosting valuation and improving revenue and earnings.
  
• Strategic focus on subscription and data revenue in Connectivity aims for long-term revenue growth, enhanced by strong M&A activity.
  
• Lingering challenges in key segments and macroeconomic shifts may threaten Ziff Davis's revenue stability and future growth despite anticipated improvements.

Catalysts

Operates as a digital media and internet company in the United States and internationally.

• Ziff Davis plans to accelerate revenue growth from 2.8% in 2024 to a midpoint of 5% in 2025 and improve adjusted EBITDA growth from 2.3% to 6%, driven by segment performance improvements. This is expected to enhance overall revenue and earnings.
  
• The restructuring into five reportable segments aims to provide greater transparency for investors, potentially increasing confidence and valuation of each segment, which can improve investor perception and ultimately aid in lifting net margins and earnings.
  
• The Tech & Shopping segment, particularly through brands like CNET and PCMag, is anticipated to be the strongest grower in 2025, especially on the bottom line with margin expansion. This will likely boost revenue and net margins.
  
• The company is focusing on long-term gains in its high-potential Connectivity business by prioritizing subscription and data revenue over ad business. This strategic shift is targeted to unlock higher revenue growth potential.
  
• Ziff Davis remains active in mergers and acquisitions, with plans for significant M&A activity in 2025, potentially increasing revenue streams and market share across its operating segments and contributing positively to earnings growth.

Ziff Davis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ziff Davis's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 11.8% in 3 years time.
• Analysts expect earnings to reach $188.6 million (and earnings per share of $4.22) by about March 2028, up from $63.0 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 14.4x on those 2028 earnings, down from 27.7x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 19.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.55%, as per the Simply Wall St company report.

Ziff Davis Future Earnings Per Share Growth

Risks

• Ziff Davis experienced a decline in its Cybersecurity and Martech segment revenues for 2024, which could indicate ongoing challenges that may affect future earnings, despite expectations of growth in 2025.
  
• The company missed its Q4 revenue expectations due to underperformance in its Humble Games and Connectivity businesses, which could suggest potential risks to revenue stability if these shortfalls persist.
  
• The Connectivity segment faced disruptions as a result of a significant reorganization, including leadership changes, which might impact the segment's ability to meet growth expectations and therefore affect the company's overall revenue growth.
  
• The Tech & Shopping segment, although recovering, recently faced tough challenges, including a 25% decline over two years and reliance on a volatile B2B lead-gen business, which could risk revenue stability if similar challenges reoccur.
  
• Macroeconomic factors, including potential changes in global economic conditions and advertising industry shifts, may impact the company, as acknowledged by leadership, potentially affecting revenue and net margins.

Valuation

• The analysts have a consensus price target of $62.286 for Ziff Davis 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 $80.0, and the most bearish reporting a price target of just $48.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $188.6 million, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 8.6%.
• Given the current share price of $40.79, the analyst price target of $62.29 is 34.5% 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.