Net2Phone's AI Agent Will Transform Customer Interactions And Lower Costs

Key Takeaways

• New features in IDT's NRS and net2phone's AI agent could enhance market penetration and improve revenue and net margins.
  
• Share repurchase and dividend increase plans suggest strong cash flow and potential earnings per share growth.
  
• Reliance on BOSS Money for working capital, forex impacts, acquisition dependence, capital allocation concerns, and federal policy risks threaten IDT's profitability and growth.

Catalysts

Provides communications and payment services in the United States, the United Kingdom, and internationally.

• IDT's NRS segment is launching new features and functionalities, which are expected to deepen market penetration and drive revenue growth in the independent retailer market. This is anticipated to bolster recurring revenue and adjusted EBITDA.
  
• The introduction of net2phone's virtual AI agent is projected to enhance customer interactions while reducing costs, potentially increasing net margins and driving growth in earnings.
  
• IDT's BOSS Money is focusing on margin improvement, particularly in the retail channel, which has led to a substantial boost in gross profit and adjusted EBITDA for the Fintech segment, signaling potential growth in net margins.
  
• The company's intention to continue repurchasing shares and increasing dividends, backed by strong cash generation, suggests improved earnings per share (EPS) growth potential.
  
• With ongoing subscription revenue growth and strategic investments in AI and digital channels, net2phone's future performance is expected to boost revenue and improve adjusted EBITDA margins.

IDT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IDT's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 7.9% in 3 years time.
• Analysts expect earnings to reach $100.5 million (and earnings per share of $4.17) by about March 2028, up from $79.9 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 22.1x on those 2028 earnings, up from 16.4x today. This future PE is greater than the current PE for the US Telecom industry at 10.5x.
• Analysts expect the number of shares outstanding to decline by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

IDT Future Earnings Per Share Growth

Risks

• IDT's reliance on the BOSS Money business model requires substantial working capital, which could impact operating cash flows if not managed carefully or if competition increases, affecting profitability.
  
• The foreign exchange translation negatively impacted net2phone's growth when results are viewed in dollar terms, which could affect perceived revenue growth and net margins if currency volatility continues.
  
• IDT’s international expansion plans are currently not organic and depend on acquisitions, which carries the risk of integration difficulties and unforeseen expenditures that could impact earnings.
  
• The increase in cash used for stock repurchases and dividends may raise concerns about future capital allocation priorities, potentially impacting long-term investment in growth initiatives and earnings.
  
• Potential changes in federal immigration policies pose an external risk that could impact revenue, particularly for the BOSS Money and NRS segments, if they lead to reduced transaction volumes or decreased customer activity.

Valuation

• The analysts have a consensus price target of $77.2 for IDT 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 $1.3 billion, earnings will come to $100.5 million, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 6.2%.
• Given the current share price of $51.82, the analyst price target of $77.2 is 32.9% 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.