TikTok Return And Gen AI Will Unlock Monetization Opportunities

Key Takeaways

• Restructuring and workforce reduction aim to improve profitability while enhancing monetization channels to boost revenue.
  
• Deployment of AI capabilities and subscription growth suggest potential for sustained revenue growth and user engagement.
  
• Heavy reliance on new products like AI features must succeed to offset declining legacy segments, amid regulatory risks and restructuring-related operational disruptions.

Catalysts

Zedge, Inc. builds digital marketplaces and competitive games around content that people use to express themselves.

• The return of TikTok to the app stores is expected to boost advertising demand and increase CPMs, positively impacting Zedge's advertising revenue in the coming quarters.
  
• The company's restructuring plan, which includes a substantial reduction in workforce and closure of the Norway office, aims to save approximately $4 million annually, thus improving net margins and profitability.
  
• The growing subscription revenue, which increased by 13% year-over-year, and the expansion of new and higher-value subscription offerings indicate sustained revenue growth and enhanced earnings potential.
  
• The development and deployment of Gen AI capabilities, such as image-to-image editing and AI audio creation tools, are expected to drive user engagement and open new monetization opportunities, potentially increasing revenue.
  
• Zedge's focus on optimizing and expanding monetization channels, including Zedge Premium and rewarded video usage, is likely to boost gross transaction volume (GTV) and improve overall earnings.

Zedge Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zedge's revenue will decrease by 1.0% annually over the next 3 years.
• Analysts are not forecasting that Zedge will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Zedge's profit margin will increase from -6.6% to the average US Interactive Media and Services industry of 10.4% in 3 years.
• If Zedge's profit margin were to converge on the industry average, you could expect earnings to reach $3.0 million (and earnings per share of $0.25) by about April 2028, up from $-1.9 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 17.6x on those 2028 earnings, up from -14.3x 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 decline by 4.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Zedge Future Earnings Per Share Growth

Risks

• The unclear regulatory status and temporary ban of TikTok caused a significant decline in ad revenue, which remains a risk if future restrictions or issues arise, potentially recurring impacts on Zedge's revenue.
  
• The company experienced a 10% year-over-year decline in total revenue primarily due to industry-wide advertising headwinds, impacting overall financial performance.
  
• Continued challenges with GuruShots, with a 33% year-over-year revenue decline, highlight potential weaknesses in sustaining or growing user engagement, impacting revenue generation.
  
• Restructuring efforts, while aimed at improving profitability, include significant workforce reductions, which may lead to short-term operational disruptions and affect long-term growth prospects, impacting net margins and earnings.
  
• Heavy reliance on new or emerging products such as AI features and other innovations must be successfully executed to compensate for declining legacy segments, posing execution and market acceptance risks that could affect future revenue streams.

Valuation

• The analysts have a consensus price target of $3.5 for Zedge based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $28.5 million, earnings will come to $3.0 million, and it would be trading on a PE ratio of 17.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of $2.0, the analyst price target of $3.5 is 42.9% 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.