Data Science And Carrier Partnerships Will Drive Future Opportunities

Key Takeaways

• MediaAlpha aims to leverage growth in auto and Medicare Advantage markets, enhancing revenue and future earnings prospects.
  
• Investments in technology and partnerships are set to drive advertising efficiency and improve operating leverage.
  
• Legal challenges, health vertical declines, increasing costs, and reliance on external traffic acquisition may collectively pressure MediaAlpha's margins and earnings growth.

Catalysts

Through its subsidiaries, operates an insurance customer acquisition platform in the United States.

• MediaAlpha expects to capitalize on sustained growth in the auto insurance advertising market due to improving carrier financial results and increased competition for market share, which should drive future revenue growth.
  
• There is a significant long-term growth opportunity in the Medicare Advantage market, a nascent stage industry with a strong market position for MediaAlpha, which could enhance future revenue and earnings.
  
• Improvements in the personal auto space are anticipated as insurance carriers achieve rate adequacy and focus on acquiring new customers, which should positively impact revenue and profit margins.
  
• Technological advancements, including investments in data science to drive advertising efficiency, are expected to increase both revenue and operating leverage.
  
• Strategic investments in expanding carrier partnerships and agent-based businesses are likely to bolster revenue and enable operating leverage improvements over time.

MediaAlpha Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MediaAlpha's revenue will grow by 12.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 4.6% in 3 years time.
• Analysts expect earnings to reach $56.9 million (and earnings per share of $1.09) by about April 2028, up from $16.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $63.3 million in earnings, and the most bearish expecting $50.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.3x on those 2028 earnings, up from 27.1x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 16.7x.
• Analysts expect the number of shares outstanding to grow 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 8.18%, as per the Simply Wall St company report.

MediaAlpha Future Earnings Per Share Growth

Risks

• The ongoing FTC investigation into MediaAlpha's under-65 health insurance business, including a draft complaint and settlement demand, could result in significant legal fees or settlements that may impact net margins and profit.
  
• The challenges and headwinds facing the Medicare Advantage vertical, which forms a critical part of MediaAlpha's long-term growth strategy, might limit revenue growth if these issues persist.
  
• The decline in transaction value within the health vertical, down 8% in Q4 year-over-year and projected to decline by a high-terrain percentage in Q1, could negatively affect both revenue and earnings if it continues.
  
• Overhead projections indicate increased costs due to additional headcount to support growth, potentially putting pressure on operating margins if the corresponding revenue growth doesn’t materialize as expected.
  
• MediaAlpha's strong reliance on external publishers for traffic acquisition, without a significant owned-and-operated presence, could impact earnings if the cost to acquire traffic through these channels increases significantly.

Valuation

• The analysts have a consensus price target of $16.071 for MediaAlpha 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 $23.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $56.9 million, and it would be trading on a PE ratio of 29.3x, assuming you use a discount rate of 8.2%.
• Given the current share price of $8.07, the analyst price target of $16.07 is 49.8% 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.