Family Digital Safety Demand Will Drive Long-Term Upside For This Carrier Software Provider

Catalysts

About Smith Micro Software

Smith Micro Software provides carrier grade family safety, digital lifestyle and messaging solutions for mobile network operators worldwide.

What are the underlying business or industry changes driving this perspective?

• Carrier strategies are shifting from pure 5G subscriber acquisition toward deepening relationships with high value family accounts, positioning SafePath as a core enabler of new family centric device and plan bundles that can lift recurring revenue and improve top line growth.
• The expansion of SafePath OS for kids and seniors, coupled with strong interest and trials across Europe and North America, creates a scalable platform that can be rolled out across additional carriers and geographies, increasing subscription volumes and driving sustained revenue growth.
• Recent cost reductions that remove approximately 7.2 million dollars in annual expenses, combined with a largely complete SafePath 8 development cycle, create operating leverage so that incremental revenue should translate more directly into improved net margins and faster progress to profitability.
• The move by AT&T to offer Secure Family to households regardless of their mobile carrier, along with similar cross carrier opportunities, opens a broader addressable market for Smith Micro's software which can accelerate user growth, expand high margin services and support higher earnings over time.
• A long term industry focus on digital safety and responsible device usage for children and seniors, supported by carriers like Orange, T Mobile and Boost integrating SafePath features into rate plans and promotions, should increase attach rates and average revenue per user while supporting structurally higher gross margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Smith Micro Software's revenue will grow by 44.6% annually over the next 3 years.
• Analysts are not forecasting that Smith Micro Software will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Smith Micro Software's profit margin will increase from -162.3% to the average US Software industry of 12.7% in 3 years.
• If Smith Micro Software's profit margin were to converge on the industry average, you could expect earnings to reach $7.0 million (and earnings per share of $0.27) by about December 2028, up from $-29.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $11.4 million in earnings, and the most bearish expecting $-2.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.8x on those 2028 earnings, up from -0.5x today. This future PE is lower than the current PE for the US Software industry at 32.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.92%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company remains heavily dependent on a small number of large carrier partners and is already experiencing launch delays and contract reprioritizations. If carriers continue to defer or cancel new SafePath features and deployments, projected user growth may not materialize, pressuring revenue and slowing progress toward profitability.
• Despite the secular tailwind of increased digital safety and family focused services, Smith Micro's Family Safety revenue is currently declining and overall revenue is shrinking year on year. This indicates the business has not yet converted the long-term trend into tangible demand at scale and could see further revenue contraction if trials fail to convert into full rollouts.
• The path to mid 2026 profitability relies on substantial cost cutting and a leaner workforce after a 30 percent reduction. If execution missteps or product delays emerge from reduced capacity while the company still records multi million dollar quarterly losses, net margins and earnings could remain negative for longer than management expects.
• To fund operations the company has repeatedly issued equity and short term notes with warrants, and currently has only $1.4 million of cash on the balance sheet. Further capital raises at depressed share prices could lead to ongoing dilution that offsets any improvement in earnings per share and undermines share price appreciation.
• Long-term ambitions to reach gross margins of 85 percent assume sustained pricing power and a mix shift toward high margin software. However, competitive pressures, carrier bargaining power and the loss of products like ViewSpot could cap margins below these targets and limit the uplift to operating income and earnings over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $4.5 for Smith Micro Software 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 $5.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $55.5 million, earnings will come to $7.0 million, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $0.59, the analyst price target of $4.5 is 86.8% 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.