AI Investments And Acquisitions Will Expand Technology Publishing And Cybersecurity

Key Takeaways

• Strategic acquisitions and AI investments are expected to boost technology publishing and cybersecurity earnings, enhancing future advertising and subscription revenues.
  
• Simplifying B2B ad products aims to improve margins and drive adjusted EBITDA growth, supporting capital allocation strategies like buybacks and M&A.
  
• Challenges in martech and cybersecurity, shifts in advertising dynamics, and reduced product offerings could negatively impact Ziff Davis's revenue and financial performance.

Catalysts

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

• The acquisition of CNET and other strategic M&A activities are expected to bolster Ziff Davis's technology publishing presence and expand its digital media portfolio, potentially increasing advertising revenue in the future.
  
• Ziff Davis's investment in AI-driven products, such as Ekahau AI Pro and VIPRE AI Advisor, may enhance its tech and cybersecurity offerings, leading to improved earnings and revenue growth in these segments.
  
• The planned simplification of B2B ad products is aimed at improving margins, which could lead to better net margins in 2025 despite potential negative organic growth impacts in the short term.
  
• The digital media segment has shown strong growth with improved advertising and subscription revenues, which, combined with a full quarter of revenue from new acquisitions, could drive revenue and adjusted EBITDA growth in Q4 2024 and into 2025.
  
• Free cash flow generation is improving, supporting capital allocation strategies like share repurchases and M&A, which could enhance EPS growth and shareholder value.

Ziff Davis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ziff Davis's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 16.2% in 3 years time.
• Analysts expect earnings to reach $264.5 million (and earnings per share of $6.04) by about December 2027, up from $62.4 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 39.9x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 25.4x.
• Analysts expect the number of shares outstanding to grow by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.74%, as per the Simply Wall St company report.

Ziff Davis Future Earnings Per Share Growth

Risks

• The B2B technology sector is undergoing a simplification process, which involves reducing the number of advertisement products offered, potentially leading to a decrease in revenue as the focus shifts to improving margins. This could impact net margins and earnings negatively in the short term.
  
• There are ongoing challenges in the cybersecurity and martech segments with declining revenues and customer acquisition difficulties, particularly in the Moz SEO business. These issues could affect overall revenue and earnings if not resolved.
  
• The uncertainty and confusion surrounding search and AI could have a chilling effect on customer acquisition for SEO-related products, impacting revenues in the martech vertical.
  
• The market dynamics in the advertising sector involve risks due to potential shifts in advertising dollars towards other platforms such as search and social media, which could impact revenue growth derived from advertising.
  
• Any potential headwinds in organic growth from the B2B sector and the cybersecurity and martech segments could adversely affect revenue and the overall financial performance of the company.

Valuation

• The analysts have a consensus price target of $73.43 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 $58.0.
• 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 $264.5 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 7.7%.
• Given the current share price of $58.18, the analyst's price target of $73.43 is 20.8% 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.