US Gift Card Protection Will Improve Security While Facing Challenges

Key Takeaways

• Strategic focus on high-growth areas and divestment of non-core operations could soon lead to sustainable free cash flow.
  
• Anticipated partnerships and customer advocacy may enhance revenue streams and boost earnings stability.
  
• Narrowed focus and increased costs may impact revenue growth, earnings volatility, and cash flow while managing challenges with customer churn and pricing strategies.

Catalysts

Provides digital watermarking solutions in the United States and internationally.

• Digimarc's strategic focus on retail loss prevention, physical authentication, and digital authentication is expected to capitalize on deep product-market fit, potentially driving significant future revenue growth.
  
• The upcoming rollout of the gift card protection solution is poised to capture market share in the U.S. initially and later expand internationally, significantly contributing to ARR growth and creating a potential for increased revenue.
  
• Expansion of subscription gross margins from increased operational efficiency and the development of the Illuminate platform could improve future net margins.
  
• Anticipated partnerships and customer advocacy in areas like PLU fraud solutions and collaboration with suppliers in loyalty and reward programs are expected to enhance revenue streams and increase earnings stability.
  
• The strategic decision to focus on high-growth areas after divesting non-strategic operations might soon lead to sustainable free cash flow generation, positively impacting cash flow and financial health.

Digimarc Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Digimarc's revenue will decrease by 2.9% annually over the next 3 years.
• Analysts are not forecasting that Digimarc will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Digimarc's profit margin will increase from -106.7% to the average US Software industry of 13.4% in 3 years.
• If Digimarc's profit margin were to converge on the industry average, you could expect earnings to reach $4.6 million (and earnings per share of $0.22) by about August 2028, up from $-40.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 129.9x on those 2028 earnings, up from -6.2x today. This future PE is greater than the current PE for the US Software industry at 36.3x.
• Analysts expect the number of shares outstanding to grow by 0.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Digimarc Future Earnings Per Share Growth

Risks

• Digimarc has recently narrowed its focus to specific opportunity sets, resulting in the de-emphasis or exiting of other business areas, which may reduce potential revenue streams and impact overall revenue growth.
  
• The company highlights the expectation of lumpiness in their financials as they transition focus, which indicates potential volatility in earnings.
  
• Digimarc experienced a decline in total revenue, reflecting a 6% decrease from Q1 last year, along with an 8% drop in subscription revenue, which could be concerning for future revenue stability.
  
• The company's challenges with increased customer churn and strategic price aggressiveness in certain areas could impact ARR growth, affecting overall earnings projections.
  
• Legal and public relations costs external to operational activities are expected to increase cash flow usage significantly in the short term, potentially impacting net margins and cash flow objectives.

Valuation

• The analysts have a consensus price target of $22.5 for Digimarc 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 $30.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $34.7 million, earnings will come to $4.6 million, and it would be trading on a PE ratio of 129.9x, assuming you use a discount rate of 8.5%.
• Given the current share price of $11.62, the analyst price target of $22.5 is 48.4% higher. Despite analysts expecting the underlying buisness 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.