Our view: Solid Q1/24 results were notably ahead of our expectations driven by improving digital advertising trends across the board bolstered by double-digit YoY organic growth in MAUs. Following our estimate revisions, our price target increases from $14 to $15.
Key points:
• Demand for authenticity in a GenAI environment could represent a major structural shift. Consistent with our mid-2020s content inflection period, we believe VerticalScope is well positioned to benefit from what is now rising demand for authentic content in a proliferating GenAI environment that will necessitate much more sophisticated personalization. While VerticalScope's earnings have not been immune to macro headwinds that emerged in 2023, we believe this structural shift alongside the early stages of a cyclical recovery that is well underway sets up for accelerating earnings growth in 2024E and 2025E. Against this improving backdrop, we believe current valuation levels represent one of the most attractive buying opportunities in our coverage given solid execution, new product traction, accretive tuck-in M&A potential, and a highly profitable and FCF generative business model.
• Monetization is far from firing on all cylinders. Following somewhat of a 'breakout' quarter for digital advertising (+26.0% YoY underpinned by +12.1% YoY MAU growth, growth in video advertising, renewed industry/ CPM strength, improved ad tech, richer content), management indicated that all trends are continuing to accelerate in Q2/24. Importantly, we believe the VerticalScope engine is far from firing on all cylinders reflecting: (i) what looks to be early days in the structural shift in search to more authentic forum/community content alongside appreciating proprietary data for LLM licensing and eventual third-party cookie degradation (65MM registered users, 76MM forum MAUs); (ii) the potential for a broader cyclical recovery in digital advertising (both programmatic and direct); (iii) greater video monetization and mobile app penetration (which management indicated remains modest); (iv) a bottoming of e-commerce revenues (65% subscription, 65% forum- driven) that should benefit from MAU acceleration and new products/ services; and (v) what should be the resumption of a highly accretive tuck-in M&A playbook that will be forum/community-focused across a deep and somewhat proprietary pipeline of potential targets.
• Other notables. (i) net debt/EBITDA was 1.8x as at Q1/24 (down from 2.5x in Q1/23) providing the financial flexibility to resume the M&A playbook (the first acquisition in 2024 closed in Q2/24 in the boating vertical for <$1MM); (ii) management indicated that the company is taking a go-slow approach to LLM-driven data monetization with the objective of value optimization (partners, deal types) as the LLM environment continues to evolve; and (iii) management expects revenue growth to accelerate in 2024 reiterating a target 40%+ adjusted EBITDA margin with the impact of revenue flow-through offset in part by ongoing reinvestments.