Oracle Cloud And NetSuite Investments To Propel Market Share And Efficiency Gains

Key Takeaways

• Shift towards high-margin products and strategic investments in technology like Oracle Cloud Infrastructure and NetSuite aims to boost profitability and reduce costs.
  
• Targeting markets left by Cisco and Microsoft, and expanding into less saturated international markets, likely to increase market share and diversify revenue sources.
  
• Transition challenges, investment in technology, and risks of international expansion could impede near-term profitability and long-term revenue growth.

Catalysts

Provides cloud communication platform and services, video collaboration, and managed IT services for businesses in the United States and internationally.

• Leveraging strategic investments in Oracle Cloud Infrastructure (OCI) for hosting and NetSuite for accounting to enhance operational efficiency and long-term profitability, potentially reducing operational costs and improving net margins.
  
• Exploiting market opportunities from competitors, specifically targeting Cisco and Microsoft's phased-out services to capture additional market share, likely increasing revenue and expanding the customer base.
  
• Focusing on high-margin product offerings and operational refinements to improve gross and net margins, as evidenced by the shift away from low-margin product revenue and the enhancement of organizational agility.
  
• Expansion into the international market, especially in Europe and the Pacific Rim, where cloud communications are less prevalent, aiming at revenue growth through geographical diversification.
  
• Increasing efficiency in customer support and installation response times to enhance service quality, which could lead to higher customer satisfaction, retention rates, and ultimately, positively impact revenue growth.

Assumptions

• Analysts are assuming Crexendo's revenue will grow by 10.6% annually over the next 3 years.
• Analysts are assuming Crexendo's profit margins will remain the same at 4.9% over the next 3 years.
• Analysts expect earnings to reach $3.7 million (and earnings per share of $0.16) by about October 2027, up from $2.8 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 48.9x on those 2027 earnings, down from 56.2x today. This future PE is greater than the current PE for the US IT industry at 43.7x.
• Analysts expect the number of shares outstanding to decline by 4.23% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.01%, as per the Simply Wall St company report.

Risks

• The slow migration schedule from Legacy Classic platform to the VIP platform may delay revenue recognition from newer services, potentially affecting short-term earnings.
  
• High upfront investment costs in Oracle cloud infrastructure and NetSuite, without immediate corresponding savings, could impact net margins in the near term.
  
• Continuous need for investment in the technology platform to stay competitive, especially against stiff competition, could strain operating expenses and affect profitability.
  
• Possible challenges in managing the increased operational complexity and integration of future acquisitions might impact net income negatively if not executed strategically and efficiently.
  
• Relying on the success of international expansion, specifically in less prevalent cloud communications markets like Europe and the Pacific Rim, poses risks due to the unpredictability of new market penetration, which could affect long-term revenue growth.

Valuation

• The analysts have a consensus price target of $6.5 for Crexendo 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 2027, revenues will be $77.1 million, earnings will come to $3.7 million, and it would be trading on a PE ratio of 48.9x, assuming you use a discount rate of 7.0%.
• Given the current share price of $5.86, the analyst's price target of $6.5 is 9.8% 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.