Virtual Markets Will Shrink Amid In-Person Shifts And Regulation

Key Takeaways

• Growing preference for in-person events and intense competition from tech giants are limiting ON24's growth prospects and eroding its pricing power.
  
• Data privacy challenges and the need for ongoing investments to sustain competitiveness constrain ON24's margin expansion and threaten long-term earnings.
  
• ON24's focus on AI-powered solutions, enterprise customers, and first-party data innovation is driving revenue growth, margin expansion, and improved long-term business stability.

Catalysts

Provides a cloud-based intelligent engagement platform that offers interactive and personalized digital experience products to create and capture data from professionals to provide businesses with buying signals and behavioral insights to convert prospects into customers worldwide.

• The rapid shift back to in-person and hybrid events is limiting the long-term growth of pure virtual event platforms, which is likely to cap ON24's revenue expansion as its core addressable market contracts.
  
• Escalating digital privacy concerns and evolving data regulations globally may curtail ON24's ability to leverage first-party data and advanced analytics, impairing differentiation and putting downward pressure on net margins and long-term earnings.
  
• Intensifying competition from large tech ecosystems (e.g., Microsoft, Google, Zoom) is eroding ON24's pricing power, resulting in industry-wide commoditization and margin compression that will challenge future profitability.
  
• Persistent revenue stagnation and limited visibility into sustainable top-line growth-management only guides for flat-to-slightly positive ARR in Q4 and continues to see net customer declines at the SMB level-suggest ongoing revenue headwinds that challenge valuation.
  
• ON24's margin improvement is largely dependent on continuous cost reduction and operational discipline, but ongoing R&D and sales investments required to maintain innovation and competitiveness may limit further operating leverage and constrain future earnings growth.

ON24 Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming ON24's revenue will decrease by 1.5% 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 -20.7% to the average US Software industry of 11.4% in 3 years.
• If ON24's profit margin were to converge on the industry average, you could expect earnings to reach $15.2 million (and earnings per share of $0.34) by about March 2029, up from -$28.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 30.0x on those 2029 earnings, up from -12.0x today. This future PE is greater than the current PE for the US Software industry at 29.4x.
• Analysts expect the number of shares outstanding to grow by 0.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Risks

• ON24 is demonstrating strong adoption of its AI-powered ACE solution, with a growing percentage of customers paying for these features, driving higher enterprise deal sizes, increased cross-sell momentum, and supporting improvements in ARR, which could reinforce revenue growth and expand margins over time.
  
• The company is successfully shifting its customer base toward larger enterprises, as evidenced by growth in high-value ($100,000+ ARR) accounts, record multi-year commitments, and an all-time high in average ARR per customer, enabling greater revenue predictability and long-term top line stability.
  
• ON24's innovation around first-party data, content automation, multilingual support, and advanced analytics leverages secular trends in marketing personalization, global digital events, and the strategic importance of first-party engagement data, potentially differentiating ON24 from commoditized competitors and supporting sustained pricing power and revenue expansion.
  
• Operational discipline has resulted in six consecutive quarters of positive free cash flow, consistent gross margins around 76-77%, and the achievement of positive adjusted EBITDA, improving the company's ability to fund R&D, weather competitive pressures, and support eventual earnings growth.
  
• Customer retention metrics have reached multi-year highs, with notable success in winning back previous customers ("boomerangs") from competitors-suggesting ON24's solution is highly valued relative to alternatives, decreasing churn, stabilizing ARR, and underpinning a potential reversal to positive ARR and revenue growth in upcoming quarters.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $8.1 for ON24 based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $133.3 million, earnings will come to $15.2 million, and it would be trading on a PE ratio of 30.0x, assuming you use a discount rate of 8.5%.
• Given the current share price of $8.06, the analyst price target of $8.1 is 0.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.