Inflated Valuation Will Crumble Under Competitive And Regulatory Pressures

Key Takeaways

• Intensifying competition and integrated alternatives are shrinking LivePerson's market share and long-term revenue opportunities.
  
• Ongoing losses and high customer churn threaten recurring revenue, necessitating reliance on costly external financing.
  
• Strengthened financial foundation, rising enterprise AI adoption, key cloud partnerships, and improved operational efficiency position LivePerson for accelerated growth and more stable, recurring revenues.

Catalysts

Operates as a digital customer conversation.

• Heightened competition from both established technology giants and nimble new players is accelerating the commoditization of conversational AI tools, putting sustained downward pressure on pricing and increasing customer churn, which is likely to lead to stagnating or declining revenue over time.
  
• Customer concentration risk is becoming more severe, as renewal friction and delays among large enterprise clients have already contributed to year-over-year declines in deal values and net revenue retention rates falling to 78 percent; this trend threatens long-term subscription growth and puts recurring revenue at risk.
  
• Persistent net losses and negative cash flows, largely driven by elevated research and development and customer acquisition expenses, make the company increasingly reliant on refinancing or dilutive capital raises; this dynamic impairs net margins, suppresses future earnings per share and erodes shareholder value.
  
• The growing adoption of native AI and machine learning capabilities embedded within leading CRM and digital engagement platforms means enterprises are less likely to select standalone conversational AI products, reducing LivePerson's total addressable market and worsening long-term revenue prospects.
  
• Rising compliance costs and mounting concerns about privacy and data security are forcing LivePerson to balance innovation with regulatory requirements, which constrains its ability to launch differentiated, data-driven AI solutions and limits future gross margin expansion and earnings growth.

LivePerson Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LivePerson compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LivePerson's revenue will decrease by 15.1% annually over the next 3 years.
• The bearish analysts are not forecasting that LivePerson will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate LivePerson's profit margin will increase from -62.7% to the average US Software industry of 13.4% in 3 years.
• If LivePerson's profit margin were to converge on the industry average, you could expect earnings to reach $22.3 million (and earnings per share of $0.2) by about August 2028, up from $-170.3 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 6.0x on those 2028 earnings, up from -0.6x today. This future PE is lower than the current PE for the US Software industry at 36.3x.
• Analysts expect the number of shares outstanding to grow by 5.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

LivePerson Future Earnings Per Share Growth

Risks

• The completion of a significant refinancing agreement has strengthened LivePerson's capital structure, reduced total indebtedness, and extended debt maturities to 2029, directly removing financial instability concerns and enabling renewed confidence from large enterprise customers, which may lead to improved revenue and earnings growth over the long term.
  
• Increased enterprise adoption of LivePerson's Generative AI Suite, with a 45% sequential increase in AI-powered conversations and new use cases driving measurable efficiency gains for major clients, indicates a strong product-market fit that can support long-term subscription and gross margin expansion.
  
• Deepening strategic partnerships, particularly with Google Cloud and Databricks, provide access to advanced AI capabilities and infrastructure, positioning LivePerson's platform as an integrated, intelligent, and highly extensible solution for enterprises, which can increase large enterprise deal flow and strengthen future recurring revenues.
  
• Operational discipline, including cost structure optimization and transition toward a SaaS-heavy revenue base, is improving adjusted EBITDA and net margins, as evidenced by exceeding guidance and revising full year EBITDA guidance higher, which supports the prospects of more stable and improving long-term earnings.
  
• Renewed customer engagement with large enterprise clients following the refinancing, as well as a pipeline of delayed but not lost deals, suggests that recent commercial headwinds may be temporary, and resolution of capital structure issues could unlock pent-up demand, resulting in stronger revenue and net revenue retention rates in future periods.

Valuation

• The assumed bearish price target for LivePerson is $0.85, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of LivePerson'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 $1.5, and the most bearish reporting a price target of just $0.85.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $166.3 million, earnings will come to $22.3 million, and it would be trading on a PE ratio of 6.0x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $1.01, the bearish analyst price target of $0.85 is 18.8% lower.
  
• 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.