Launching 'Moments' Will Attract Premium Brands With Engaging Content Solutions

Key Takeaways

• The merger with Teads enhances Outbrain's capabilities in video and branding, potentially driving top-line growth through expanded advertiser spending.
  
• AI-based creative automation and DSP expansion enhance advertising effectiveness, targeting new customer segments, and boosting revenue and net margins.
  
• Integration risks from Teads acquisition, revenue decline, and increased expenses may suppress earnings amid questioning of the native advertising market's growth potential.

Catalysts

Operates a technology platform that connects media owners and advertisers with engaged audiences to drive business outcomes worldwide.

• The merger with Teads brings together Outbrain's performance capabilities with Teads' expertise in video and branding, creating a comprehensive solution for advertisers. This combined offering is expected to drive increased revenue from expanded advertiser spending across formats such as video and native advertising, enhancing the company's top-line growth.
  
• The integration of Outbrain and Teads aims to capture $65 million to $75 million in synergies by 2026, with significant cost savings and potential cost synergies from traffic acquisition strategies, likely improving net margins.
  
• The expansion of Outbrain's DSP capabilities, which saw a 45% increase in advertiser spend in 2024, targets the growing demand for performance marketing solutions, potentially boosting revenue and enhancing earnings from new customer segments.
  
• Launching 'Moments,' a vertical video experience for the Open Internet, provides a new revenue stream, attracting premium brands and providing advertisers with engaging content solutions, thereby increasing revenue potential.
  
• The integration of AI-based creative automation is expected to enhance advertising effectiveness and efficiency, likely leading to better ad performance and improved net margins as advertisers achieve higher returns on ad spend with targeted creatives.

Outbrain Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Teads Holding's revenue will remain fairly flat over the next 3 years.
• Analysts are not forecasting that Teads Holding will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Teads Holding's profit margin will increase from -39.1% to the average US Interactive Media and Services industry of 7.8% in 3 years.
• If Teads Holding's profit margin were to converge on the industry average, you could expect earnings to reach $102.6 million (and earnings per share of $0.99) by about June 2029, up from -$501.0 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 1.4x on those 2029 earnings, up from -0.2x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 13.2x.
• Analysts expect the number of shares outstanding to grow by 2.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.46%, as per the Simply Wall St company report.

Risks

• The recent acquisition of Teads introduces risks related to integration and synergy realization, which could lead to increased short-term operational disruptions and impact revenue growth and net margins.
  
• Revenue in Q4 decreased by 5% year-over-year, and there was a significant impact due to a key partner transitioning to new bidding technology, which could lead to ongoing revenue volatility and pressure on earnings.
  
• The net revenue retention rate of publishers was only 86%, highlighting potential risks in maintaining current client relationships and future revenue streams.
  
• The market for native advertising is facing scrutiny regarding its total addressable market (TAM), which could constrain future growth potential and adversely affect revenue projections.
  
• Operating expenses have increased, driven by transaction-related costs, which could suppress net margins and reduce earnings despite anticipated synergies and cost-saving measures.

Valuation

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

• The analysts have a consensus price target of $1.0 for Teads Holding 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 $1.3 billion, earnings will come to $102.6 million, and it would be trading on a PE ratio of 1.4x, assuming you use a discount rate of 12.5%.
• Given the current share price of $1.15, the analyst price target of $1.0 is 15.0% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.