First Party Data And E Commerce Expansion Will Support Long Term Earnings Potential

Catalysts

About Arena Group Holdings

Arena Group Holdings operates a portfolio of digital media brands and commerce platforms that use an asset light, data driven model to pursue profitable growth.

What are the underlying business or industry changes driving this perspective?

• Scaling first party data through more than 40,000 new daily user registrations and the Encore intelligence system is intended to improve ad targeting and audience curation, which could support higher advertising yields and expand revenue per user.
• Expanding e-commerce and social commerce initiatives, including drop ship driven ShopHQ and affiliate channels tied directly to audience intent, is positioned to increase the role of high margin transactional revenue and further diversify the top line away from volatile display advertising.
• Continued deployment of the entrepreneurial publisher model across existing and acquired brands provides a variable cost structure that may help preserve or expand net margins if traffic and revenue increase from a stabilized base.
• Acquisitions of under monetized digital assets such as ShopHQ, Lindy’s Sports and TravelHost at low purchase prices, with a targeted payback period of roughly one year, are intended to build a pipeline of incremental EBITDA that could affect earnings over the next several years.
• Efforts to strengthen the balance sheet, including cash generation, debt reduction and a potential refinance at different terms, may increase financial flexibility for buybacks and M&A activity, which in turn could influence earnings per share and the valuation multiple.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Arena Group Holdings's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.3% today to 15.7% in 3 years time.
• Analysts expect earnings to reach $29.6 million (and earnings per share of $0.62) by about December 2028, down from $30.5 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from 6.7x today. This future PE is greater than the current PE for the US Interactive Media and Services industry at 17.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.71%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent industry wide traffic headwinds from search and social algorithm changes could structurally cap or reduce audience volumes, limiting the upside from advertising and e-commerce initiatives and ultimately pressuring revenue growth and earnings.
• Heavy reliance on the entrepreneurial publisher and drop ship models to keep costs variable may face limits as the company scales into video, social commerce and new verticals. This could potentially force higher fixed investment that erodes currently elevated net margins and EBITDA margins.
• The long-term strategy depends on harvesting and monetizing large amounts of first party data through the Encore intelligence system, but tighter privacy rules, changing browser practices and advertiser skepticism around data quality could blunt pricing power and reduce improvements in revenue per user and net margins.
• The plan to pursue at least one high value acquisition per quarter in a distressed digital media market increases integration and execution risk. If acquired assets underperform expectations or fail to achieve a 12 month payback, the drag from these deals could weigh on EBITDA and net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $10.0 for Arena Group Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $189.0 million, earnings will come to $29.6 million, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of $4.29, the analyst price target of $10.0 is 57.1% higher. Despite analysts expecting the underlying business 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.