Leveraging AI And Global Expansion To Surge Ahead In Digital Advertising Earnings

Key Takeaways

• Strategic investments in AI and automation by DoubleVerify, specifically in video classification, are set to enhance efficiency, innovation, and financial outcomes.
  
• Expansion into social and CTV measurement alongside partnerships with Amazon and Walmart positions the company for revenue growth in high-margin sectors and retail media.
  
• Execution risk, macroeconomic conditions, heavy reliance on international and social media market expansion, increased competition, and inconsistent advertiser spending could impact revenue growth and net margins.

Catalysts

Provides a software platform for digital media measurement, and data analytics in the United States and internationally.

• DoubleVerify's strategic investments in AI and automation are poised to drive efficiency and innovation, especially in video classification, which could significantly impact gross margins and adjusted EBITDA.
  
• The company's expansion into social and CTV measurement, leveraging proprietary technology, positions it to capitalize on the shift towards video content consumption, potentially boosting revenue growth across these higher-margin segments.
  
• DoubleVerify's increased focus and momentum in the retail media sector, highlighted by burgeoning partnerships with giants like Amazon and Walmart, suggest a substantial growth avenue in supply-side revenue.
  
• The shift towards more global market penetration, particularly in digital ad spending outside the United States, indicates potential for increased international revenue contributions.
  
• The anticipated upswing in activation and measurement solutions, especially with improvements in ABS and the development of Scibids AI, indicates a pathway for robust revenue growth and a broader market share capture.

Assumptions

• Analysts are assuming DoubleVerify Holdings's revenue will grow by 18.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.0% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $123.4 million (and earnings per share of $0.68) by about September 2027, up from $61.1 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 50.0x on those 2027 earnings, down from 53.9x today. This future PE is greater than the current PE for the US Software industry at 37.3x.
• Analysts expect the number of shares outstanding to grow by 1.58% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.66%, as per the Simply Wall St company report.

Risks

• There's a significant amount of execution risk involved in closing and fully integrating Moat's customers into DoubleVerify's platform, which could affect the company's ability to achieve forecasted revenue increases and maintain its profitability margins.
  
• Potential macroeconomic conditions and specific issues within large retail and CPG advertisers could lead to reduced advertising spend, impacting DoubleVerify's revenue growth and market expansion efforts.
  
• The company's heavy reliance on the continuous growth and expansion into international markets and platforms like social media for increasing measurement impressions might not materialize as expected, affecting overall revenue projections and market share gains.
  
• Increased competition and rapid changes in digital advertising technologies and advertiser preferences could pose challenges to maintaining high double-digit growth rates in key product lines like ABS, Scibids AI, and social activation solutions, potentially affecting overall earnings.
  
• Despite the potential for revenue growth from new client wins and expansions into social, CTV, and retail media networks, the inconsistency in spend patterns from major advertisers and the time required to onboard and ramp up new clients could delay the anticipated acceleration in revenue growth, impacting net margins and earnings.
  

Valuation

• The analysts have a consensus price target of $28.59 for DoubleVerify 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 $40.0, and the most bearish reporting a price target of just $20.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.0 billion, earnings will come to $123.4 million, and it would be trading on a PE ratio of 50.0x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $19.37, the analyst's price target of $28.59 is 32.2% 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.