Expansion Into AI-driven Optimization Will Attract More Customers And Expand Services

Key Takeaways

• Expansion into AI-driven optimization and enterprise features aims to increase revenue by attracting high-value customers and upselling existing ones.
  
• Focus on product development and AI integration may enhance efficiency and profitability, targeting high-margin segments and improving net margins.
  
• Semrush's reliance on enterprise customers and new AI initiatives poses revenue risks amidst uncertain economic conditions and potential cost pressures.

Catalysts

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

• Semrush's expansion into AI-driven optimization, referred to as AIO, is expected to help customers improve their online presence and visibility, potentially increasing Semrush's revenue by attracting more customers and upselling existing ones with higher-value products.
  
• The company plans to continue investing in enterprise-grade features and expanding their enterprise offering, which could drive higher average revenue per customer and increase revenue from the enterprise segment.
  
• The success in closing enterprise SEO deals, particularly in December, and significant growth in average annual recurring revenue per customer in this segment indicate a strong revenue growth potential as enterprise customers are expected to contribute a larger share of total revenue.
  
• Semrush's focus on product development and integration, including AI features, is anticipated to enhance product efficiency and attract more customers, contributing to revenue growth and improved net margins through higher-value offerings.
  
• The potential for new AI and data intelligence offerings to create high-margin products and services, allowing for improved profitability and net margins by capturing higher-value customer segments and reducing reliance on lower-margin offerings.

Semrush Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Semrush Holdings's revenue will grow by 20.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 10.0% in 3 years time.
• Analysts expect earnings to reach $65.2 million (and earnings per share of $0.41) by about March 2028, up from $8.2 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 50.7x on those 2028 earnings, down from 172.1x today. This future PE is greater than the current PE for the US Software industry at 28.2x.
• Analysts expect the number of shares outstanding to grow by 1.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Semrush Holdings Future Earnings Per Share Growth

Risks

• The macro environment remains uncertain, with ongoing softness in the lower end of the market, which could impact Semrush's revenue growth if economic conditions do not improve or continue to pressure smaller customers.
  
• There is a dependency on enterprise customers for sustaining growth, given the slowdown at the lower end. If enterprise customer growth slows down or enterprise customer ARPU does not continue to increase, this could negatively impact revenue and earnings.
  
• The company faces potential risks with its new AI initiatives (AIO) in terms of user adoption and appropriate pricing. Initial pricing and features are still being tested, which introduces uncertainty around revenue impact.
  
• Given significant investments planned in enterprise capabilities and AI initiatives, there is a near-term risk to operating expenses outpacing revenue growth, potentially compressing net margins in the short term.
  
• With the CEO transition, although described positively, there is always inherent execution risk associated with leadership changes that could impact strategic direction and financial performance.

Valuation

• The analysts have a consensus price target of $17.571 for Semrush Holdings 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 $21.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $651.0 million, earnings will come to $65.2 million, and it would be trading on a PE ratio of 50.7x, assuming you use a discount rate of 7.4%.
• Given the current share price of $9.64, the analyst price target of $17.57 is 45.1% 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.