Falling Physical Sales Will Squeeze Margins Yet Collectibles Will Uplift

Key Takeaways

• Rising demand for collectibles provides short-term gains, but accelerating digital adoption threatens long-term revenue and margin stability for traditional categories.
  
• Heavy dependence on major retail clients and physical distribution exposes the company to volatility and risk if industry shifts or client strategies change quickly.
  
• Ongoing digitalization, customer concentration, shrinking physical media demand, and thin margins threaten long-term revenue and profitability despite recent cost improvements.

Catalysts

Operates as a wholesaler, retailer, distributor, and e-commerce provider for the entertainment industry worldwide.

• Although Alliance Entertainment is capturing growth from the resurgence of physical collectibles driven by nostalgia and pop culture-evidenced by expanding exclusive licensing, such as with Paramount, and strong SKU growth-the company remains significantly exposed to diminishing physical media sales as digital adoption accelerates. This structural headwind threatens to cap long-term net revenue growth even as near-term collectible momentum persists.
  
• While a growing demographic of Millennial and Gen Z consumers show durable interest in vinyl, gaming, and niche collectibles, ongoing shifts in consumer spending toward on-demand streaming and digital entertainment risk gradually eroding demand for Alliance's largest traditional categories, particularly DVDs and physical games, limiting the sustainability of current improvements in net margins.
  
• Despite operational efficiency gains and margin expansion from automation and cost discipline, Alliance's business depends heavily on a few large retail accounts. This customer concentration increases the risk of abrupt revenue and earnings volatility should any major client reduce orders-a vulnerability that is amplified if retail partners accelerate direct-to-consumer strategies, bypassing wholesale distributors.
  
• Even as investments in proprietary technology and direct-to-consumer fulfillment drive incremental margin improvement, the broader transition of brands and studios toward digital-first and direct-to-consumer distribution could erode Alliance's long-term pricing power and compress gross margins, particularly if Alliance cannot meaningfully grow its higher-margin product mix fast enough to offset declines elsewhere.
  
• While category diversification and acquisitions in high-growth, high-margin segments like collectibles and specialty gaming accessories offer potential to boost earnings, Alliance's heavy reliance on physical logistics infrastructure could leave the company with stranded costs and weaker operating leverage if industry consolidation or a shrinking brick-and-mortar retail footprint more rapidly undermines core distribution volumes, dragging on long-term profitability.

Alliance Entertainment Holding Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Alliance Entertainment Holding compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Alliance Entertainment Holding's revenue will decrease by 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.1% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach $38.5 million (and earnings per share of $0.73) by about August 2028, up from $11.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.7x on those 2028 earnings, down from 23.4x today. This future PE is lower than the current PE for the US Retail Distributors industry at 24.4x.
• 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 7.5%, as per the Simply Wall St company report.

Alliance Entertainment Holding Future Earnings Per Share Growth

Risks

• Alliance Entertainment continues to report flat or declining year-over-year revenue, as demonstrated by the recent nine-month period decline from $863.5 million to $835.7 million, indicating ongoing secular pressure from digitalization that could erode revenue growth over time.
  
• The company remains heavily reliant on major licensing agreements with content owners such as Paramount and large retailers like Walmart, Best Buy, and Target, creating significant customer concentration risk that could lead to sudden revenue declines or margin pressure if contracts are not renewed or purchase volumes are reduced.
  
• Growth in higher-margin categories and cost discipline have temporarily improved EBITDA and net margins, but these financial gains may be unsustainable if broader industry trends continue to shift toward digital media consumption and direct-to-consumer channels, undermining long-term earnings potential.
  
• Alliance's business is still exposed to the decline of physical media formats, which face persistent secular headwinds from streaming and digital delivery, suggesting their addressable market for DVDs, Blu-Rays, and physical games may continue to shrink, impacting both revenue and gross margin.
  
• The company's thin operating margins, highlighted by a recent 2.5 percent EBITDA margin, make it vulnerable to inflation, supply chain disruptions, or adverse changes in tariff and trade policy, as even modest shocks could compress net margins further and constrain future earnings.

Valuation

• The assumed bearish price target for Alliance Entertainment Holding is $6.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Alliance Entertainment Holding's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $38.5 million, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 7.5%.
• Given the current share price of $5.44, the bearish analyst price target of $6.0 is 9.3% 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.