Enterprise Focus And AI Tools Will Create A Competitive Edge

Key Takeaways

• Strategic focus on larger enterprise customers and enhanced go-to-market strategy expected to drive significant revenue growth and profitability.
  
• Adoption of innovative technology and improved operations aim to boost efficiency and customer retention, positively impacting earnings and long-term profitability.
  
• Execution risks and strategic shifts, alongside declining services revenue, could jeopardize Disco's profitability, long-term growth, and investor confidence amid asset valuation concerns.

Catalysts

Provides cloud-native and artificial intelligence-powered legal products for legal hold, legal request, ediscovery, legal document review, and case management in the United States and internationally.

• CS Disco's focus on enhancing its go-to-market strategy and concentrating on larger enterprise customers is expected to drive more significant revenue growth, especially from high-value clients who can bring larger, more profitable matters. This strategic focus is likely to accelerate revenue growth.
  
• By reallocating resources to hire more enterprise sales staff and refining sales roles to focus on winning new business and expansion, CS Disco aims to improve sales efficiency and productivity, which can positively impact revenue.
  
• The adoption and integration of new innovative technological capabilities, particularly in eDiscovery and the Cecilia Q&A AI tools, are expected to provide differentiated, high-value services. This innovation has the potential to boost customer retention and software revenue.
  
• Improvements in Disco's internal operations and cultural shifts are aimed at increasing organizational efficiency and employee satisfaction, which can lead to reduced costs and improved net margins over time.
  
• The company's commitment to achieving breakeven adjusted EBITDA by Q4 2026, supported by its strategic focus and efficient resource allocation, sets a clear path towards sustainable profitability, which will positively impact earnings.

CS Disco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CS Disco's revenue will grow by 5.9% annually over the next 3 years.
• Analysts are not forecasting that CS Disco will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate CS Disco's profit margin will increase from -38.5% to the average US Software industry of 11.8% in 3 years.
• If CS Disco's profit margin were to converge on the industry average, you could expect earnings to reach $20.4 million (and earnings per share of $0.33) by about April 2028, up from $-55.8 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 24.0x on those 2028 earnings, up from -3.7x today. This future PE is lower than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

CS Disco Future Earnings Per Share Growth

Risks

• The company's services revenue declined by 4% year-over-year, indicating potential trouble with its services offerings, which might affect overall revenue growth and margins if the decline continues.
  
• Disco's adjusted EBITDA remains negative, at $18.7 million for fiscal year 2024, indicating that despite revenue growth, profitability and sustainability are still at risk, which could impact long-term earnings.
  
• There was a significant non-cash impairment charge of $15.2 million related to primary law assets, which suggests potential overvaluation of assets that could impact net margins and investors' perception of asset management.
  
• The focus on targeting larger customers and adjusting the sales and customer success structures means there is execution risk in successfully transitioning to this new strategy, which could impact revenue if not effectively managed.
  
• The wider range of revenue guidance for 2025 reflects uncertainty about the ability to achieve growth targets, particularly in the face of potential sales execution challenges with new roles and focuses, impacting forecast reliability and investor confidence in future growth forecasts.

Valuation

• The analysts have a consensus price target of $6.417 for CS Disco 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 $9.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $172.0 million, earnings will come to $20.4 million, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 7.7%.
• Given the current share price of $3.43, the analyst price target of $6.42 is 46.5% 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.