Gaming And Digital Health Drive Growth, Despite Advertising And M&A Risks

Key Takeaways

• Ziff Davis's growth strategy hinges on expanding in digital media, notably gaming and health, complemented by strategic acquisitions like Gamer Network and CNET.
  
• Aggressive share buybacks and the integration of AI in products aim to enhance user experience and drive higher revenue through improved engagement and monetization.
  
• Ongoing challenges in revenue growth and profitability, volatility in key business areas, and risks from M&A and AI integration could strain financial stability.

Catalysts

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

• Ziff Davis is focusing on digital media segment growth, particularly in gaming, connectivity, health, and wellness, expecting these areas to drive revenue growth.
  
• Strategic acquisitions, including the recent purchase of Gamer Network and the pending acquisition of CNET, are anticipated to enhance Ziff Davis's existing platforms and contribute to compound growth, positively impacting revenue.
  
• The company is utilizing share buybacks aggressively, expecting adjusted EPS to be at the higher end of their guidance range, which is likely to contribute to high single-digit adjusted EPS growth year-over-year.
  
• Incorporation of AI into products and offerings, like the Downdetector Situation Report and the IGN chatbot, is aimed at improving user engagement and experience, potentially increasing session times and monetization opportunities.
  
• Ziff Davis's prudent capital allocation and buildup of dry powder position it to act decisively on M&A opportunities, indicating an operational strategy for bottom-line growth through accretive acquisitions.

Assumptions

• Analysts are assuming Ziff Davis's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 14.7% in 3 years time.
• Analysts expect earnings to reach $242.3 million (and earnings per share of $4.17) by about September 2027, up from $80.0 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 14.9x on those 2027 earnings, down from 27.0x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 25.0x.
• Analysts expect the number of shares outstanding to decline by 3.51% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.99%, as per the Simply Wall St company report.

Risks

• The second quarter financial results being below expectations, particularly with June revenues down 3%, could indicate ongoing challenges in achieving revenue growth and maintaining profitability.
  
• Dependence on tech advertising, which has been challenged for the past 2 years and swung back to negative in Q2 2024, could lead to unstable and potentially decreasing revenue streams impacting long-term financial stability.
  
• A decline of 5.8% in the Cybersecurity and Martech segment in Q2 2024 compared to the previous quarter's growth may signal volatility and uncertainty in this key business area, potentially affecting overall revenue and earnings predictability.
  
• The company’s recent acquisitions and its strategy of relying heavily on M&A for growth, if these acquired entities do not perform as expected or if integration challenges arise, could adversely affect financial performance and strain on capital resources.
  
• The shift in advertising market dynamics and the uncertain outcome of incorporating AI into products and offerings, if not yielding the anticipated benefits, could negatively impact user engagement, ad revenue, and ultimately, the profitability of digital media segments.

Valuation

• The analysts have a consensus price target of $71.57 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 $95.0, and the most bearish reporting a price target of just $44.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.6 billion, earnings will come to $242.3 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $48.21, the analyst's price target of $71.57 is 32.6% 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.