Rising Algorithm Risks Will Dampen Revenue While Recovery Emerges

Key Takeaways

• Shifting focus to enterprise and AI products boosts short-term growth, but rising generative AI and web fragmentation threaten long-term relevance and market size.
  
• Dependence on Google's ecosystem and regulatory risks around data privacy could undermine Semrush's pricing power, retention, and ability to sustain earnings growth.
  
• Reliance on Google's ecosystem, rising customer churn, cost pressures, regulatory risks, and increased competition threaten Semrush's growth, pricing power, and long-term margin expansion.

Catalysts

Develops an online visibility management software-as-a-service platform in the United States, the United Kingdom, and internationally.

• While Semrush is seeing strong adoption and robust revenue growth in its enterprise and AI-focused product lines-now expecting ARR from these segments to approach $50 million by year-end-continued fragmentation and decentralization of the web threaten to erode the universal relevance of SEM/SEO analytics, potentially capping future revenue growth even as current digital marketing complexity expands the overall opportunity.
  
• Although the company strategically reallocates resources away from its lower-value freelancer and solopreneur customer segment to focus on higher retention and higher ARPU enterprise clients, its ongoing reliance on Google's search ecosystem exposes Semrush to outsized risks from future algorithmic or platform changes, which could drive unpredictable churn and limit the stability of net margins.
  
• While overall digitization and the boom in e-commerce have historically supported a growing market for Semrush's analytics tools, rising generative AI capabilities in automating content creation and SEO could reduce demand for traditional SEO platforms, shrinking the total addressable market and putting long-term pressure on both revenues and ARPU.
  
• Despite management's disciplined capital allocation-reflected in resilient operating margins, rising average ARR per customer, and a 12% annual free cash flow margin target-the consolidation of MarTech industry participants and proliferation of low-cost or free SEO tools could weaken Semrush's pricing power, constraining margin expansion and limiting future earnings growth.
  
• Although integrating advanced AI capabilities enhances product differentiation and justifies premium pricing in the near term, increasing regulatory scrutiny on data privacy and tracking threatens to limit Semrush's ability to collect and leverage actionable data, potentially diminishing the effectiveness of its core analytics products and introducing headwinds to revenue and retention over time.

Semrush Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Semrush Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Semrush Holdings's revenue will grow by 15.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.3% today to 14.0% in 3 years time.
• The bearish analysts expect earnings to reach $88.3 million (and earnings per share of $0.56) by about August 2028, up from $-1.3 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 19.9x on those 2028 earnings, up from -824.9x today. This future PE is lower than the current PE for the US Software industry at 38.1x.
• Analysts expect the number of shares outstanding to grow by 1.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Semrush Holdings Future Earnings Per Share Growth

Risks

• The company is experiencing ongoing weakness and high churn among its lower-end customer segment, particularly freelancers and less sophisticated users, which threatens a large portion of its revenue base and could prevent overall top-line growth from accelerating.
  
• Paid search customer acquisition costs have risen significantly, causing Semrush to pull back marketing spend and accept near-term revenue headwinds, which may prolong revenue deceleration and compress operating leverage if the cost environment does not improve.
  
• Heavy revenue dependence on Google's search ecosystem makes Semrush vulnerable to algorithm changes and evolving search interface dynamics-such as the rise of AI-generated answers and fewer traditional 'blue links'-potentially undermining demand for core SEO analytics products and threatening future revenue.
  
• Persistent market saturation and intensifying competition-including the proliferation of free and low-cost SEO tools and the push towards integrated MarTech all-in-one platforms-could erode Semrush's pricing power and impede efforts to grow average revenue per user and expand net margins.
  
• Increased regulatory and economic risks, such as ongoing foreign exchange volatility and potential future data privacy regulation, directly impact expenses, reduce margin predictability, and may limit Semrush's ability to innovate and serve customers profitably, thereby threatening earnings growth over the long term.

Valuation

• The assumed bearish price target for Semrush Holdings is $9.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Semrush Holdings'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 $16.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $633.3 million, earnings will come to $88.3 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $7.12, the bearish analyst price target of $9.0 is 20.9% 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.