CloudFirst Europe And Subscription Revenue Will Create Future Stability

Key Takeaways

• Shift to subscription-based models enhances revenue stability and provides a more reliable earnings outlook.
  
• European market entry and infrastructure expansion boost international diversification and support scalable growth.
  
• Transition to a subscription model and international expansion may strain short-term revenue and margins amidst rising expenses and competitive pressures.

Catalysts

Provides data management and cloud solutions in the United States and internationally.

• Data Storage Corporation's shift towards predictable, subscription-based recurring revenue models is expected to enhance future revenue stability and growth, allowing for a more reliable earnings outlook.
  
• The company's entry into the European market via the establishment of CloudFirst Europe Limited is anticipated to provide opportunities for international revenue expansion and diversification.
  
• The integration of Flagship and CloudFirst is expected to consolidate technical capabilities and enhance operational synergies, potentially improving net margins and driving revenue growth through cross-selling opportunities.
  
• Investments in cybersecurity, compliance, and platform expansion are set to position Data Storage Corporation as a trusted provider in regulated markets, which could lead to an increase in high-margin contracts and client acquisition.
  
• Expansion efforts, such as the addition of new Tier 3 data centers and a growing global infrastructure footprint, are expected to support scalable growth and optimize performance, contributing positively to future revenue streams.

Data Storage Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Data Storage's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $1.7 million (and earnings per share of $0.22) by about April 2028, up from $523.2 thousand 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 45.8x on those 2028 earnings, which is the same as it is today today. This future PE is greater than the current PE for the US IT industry at 33.9x.
• Analysts expect the number of shares outstanding to grow by 1.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Data Storage Future Earnings Per Share Growth

Risks

• The modest top-line growth of only 2% from 2023 to 2024 could indicate challenges in significantly expanding revenue, potentially impacting future earnings growth.
  
• The company's shift from hardware and one-time project revenues to a subscription-based model, while stabilizing, may impact short-term revenue given the decline in one-time hardware sales and managed service revenue.
  
• Increasing selling, general, and administrative expenses by 13% could squeeze net margins, especially if revenue growth does not accelerate to offset these increased costs.
  
• The initial costs and uncertainties associated with international expansion to the U.K, coupled with potential delays in achieving breakeven in new markets, may negatively affect earnings if expansion efforts do not quickly yield expected results.
  
• The competitive environment and strong reliance on partnerships could pose risks to sustaining revenue growth and margins, particularly if key alliances do not perform as anticipated.

Valuation

• The analysts have a consensus price target of $9.0 for Data Storage 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 $33.5 million, earnings will come to $1.7 million, and it would be trading on a PE ratio of 45.8x, assuming you use a discount rate of 7.8%.
• Given the current share price of $3.38, the analyst price target of $9.0 is 62.5% 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.