AI Adoption And Multi-Product Use Will Drive Future Opportunity

Key Takeaways

• ON24's AI and multi-product strategies drive increased adoption and revenue growth, with expanding customer usage boosting ARR and net margins.
  
• Strategic focus on regulated industries and enhanced customer retention stabilize revenue, supporting long-term profitability and cash flow.
  
• ON24 faces revenue challenges, customer retention issues, constrained growth due to budgeting, and anticipated operating losses despite cost controls and restructuring efforts.

Catalysts

Provides a cloud-based intelligent engagement platform that enables businesses to convert customer engagement into revenue through interactive webinar, virtual event, and multimedia content experiences worldwide.

• ON24's launch of the AI-powered ACE platform has seen significant adoption, growing to over 20% of growth ARR bookings in Q4 2024. As this product continues to gain traction, it is expected to drive revenue growth through increased customer adoption and enhanced platform differentiation. This directly impacts revenue growth and ARR enhancement.
  
• The company has improved its customer retention rates, with the highest gross retention levels in three years and mid-single-digit improvements in net retention for their enterprise business. Continued improvements in retention are likely to stabilize revenue and support net revenue retention rates, positively affecting cash flow and earnings stability.
  
• ON24's focus on multi-product adoption has led to an all-time high of close to 40% of customers using two or more products. This broadening of product usage across the customer base is expected to increase overall revenue per customer, impacting revenue growth and improving net margins through cross-sell opportunities.
  
• With strategic advancements in targeting regulated industries (such as life sciences and financial services), ON24 anticipates increased enterprise business through mission-critical use cases. This strategy is likely to sustain and enhance revenue growth and profitability, particularly as enterprises in these verticals commit to longer-term contracts.
  
• Continued innovation with a strategic focus on AI, especially with new product introductions planned for 2025, positions ON24 for future growth. This investment in innovation is aimed at further differentiating its platform, which is expected to enhance revenue growth through new customer acquisition and increased usage by existing customers, thereby supporting a positive trend in ARR and earnings.

ON24 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ON24's revenue will decrease by 3.2% annually over the next 3 years.
• Analysts are not forecasting that ON24 will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate ON24's profit margin will increase from -28.5% to the average US Software industry of 12.0% in 3 years.
• If ON24's profit margin were to converge on the industry average, you could expect earnings to reach $16.2 million (and earnings per share of $0.38) by about May 2028, up from $-42.2 million 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 24.3x on those 2028 earnings, up from -4.7x today. This future PE is lower than the current PE for the US Software industry at 31.6x.
• Analysts expect the number of shares outstanding to grow by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.69%, as per the Simply Wall St company report.

ON24 Future Earnings Per Share Growth

Risks

• Despite some positive indicators, ON24's total revenue decreased by 6% year-over-year in Q4 2024, suggesting a potential challenge in top-line growth which could impact future revenue growth prospects.
  
• The company's Annual Recurring Revenue (ARR) decreased by $2.3 million from Q3 to Q4 of 2024, indicating potential struggles in maintaining consistent or increasing revenue streams which could affect earnings stability.
  
• Significant downsells by two major customers in 2024, while still resulting in multimillion-dollar commitments, suggest customer satisfaction or reliance issues, which could impact future net margins and revenue retention.
  
• Marketing budgets are still constrained, impacting ON24's growth potential. Although green shoots in technology and customer winbacks are noted, ongoing tight budgets in key sectors could restrict revenue expansion.
  
• Despite focusing on cost controls and restructuring, ON24 expects a non-GAAP operating loss in 2025, which poses risks to net earnings and long-term profitability targets, especially in the face of macroeconomic uncertainty.

Valuation

• The analysts have a consensus price target of $7.333 for ON24 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 $6.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $134.5 million, earnings will come to $16.2 million, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 7.7%.
• Given the current share price of $4.73, the analyst price target of $7.33 is 35.5% 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.