Adlumin Acquisition May Expand Market Reach, But Integration Challenges And Margin Pressures Could Impact Profitability

Key Takeaways

• The acquisition of Adlumin is set to enhance N-able's security offerings and expand market reach for potential revenue growth.
  
• Focusing on innovation and long-term contracts is expected to drive revenue growth and improve customer retention.
  
• Integration challenges, revenue recognition timing, foreign exchange risks, and retention rate issues could pressure profitability and investor confidence.

Catalysts

Provides cloud-based software solutions for managed service providers in the United States, the United Kingdom, and internationally.

• The strategic acquisition of Adlumin, an AI-powered, cloud-native XDR platform, is expected to enhance N-able's security offerings and extend their market reach, potentially boosting future revenues through cross-selling opportunities and new customer acquisitions.
  
• N-able's focus on expanding its go-to-market strategy by leveraging the North American reseller channel acquired with Adlumin and replicating this success internationally suggests a potential for increased revenues as they tap into a wider customer base beyond traditional MSPs.
  
• Investments in innovation, such as AI-powered enhancements in unified endpoint management (UEM) and data protection, are likely to drive future revenue growth by offering differentiated, high-value solutions to SMB and mid-market customers.
  
• Transitioning to long-term contracts, with over 50% of revenue now coming from annual contracts, is expected to create stickier customer relationships, improve gross and net retention rates, and ultimately enhance earnings through more predictable revenue streams.
  
• Scaling the multi-tenanted product offerings, including the successful Cove Data Protection solution, presents an opportunity to consolidate customer environments, enhancing net revenue retention and contributing to higher margins as customers adopt more comprehensive N-able solutions.

N-able Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming N-able's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.6% today to 4.0% in 3 years time.
• Analysts expect earnings to reach $23.3 million (and earnings per share of $0.12) by about March 2028, down from $31.0 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 101.0x on those 2028 earnings, up from 42.2x today. This future PE is greater than the current PE for the US Software industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 2.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.03%, as per the Simply Wall St company report.

N-able Future Earnings Per Share Growth

Risks

• The acquisition of Adlumin, while a strategic addition, introduces challenges that could disrupt integration efforts and lead to unforeseen costs, potentially affecting adjusted EBITDA margins.
  
• The impact of revenue recognition timing due to extended contract initiatives may cause transitory lumpiness in revenue growth, affecting both consistency in financial reporting and investor confidence.
  
• Foreign exchange rate fluctuations present a risk to international revenue stability, and unexpected currency movements could adversely affect revenue and profitability.
  
• Gross margins have shown a slight decrease from the previous year, which, if continued, could pressure overall profitability and affect net earnings.
  
• The need to increase the gross and net retention rates, as highlighted by lower retention metrics, underlines a risk of customer attrition and challenges in achieving desired organic growth levels.

Valuation

• The analysts have a consensus price target of $9.25 for N-able 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 $581.0 million, earnings will come to $23.3 million, and it would be trading on a PE ratio of 101.0x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $6.92, the analyst price target of $9.25 is 25.2% 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.