Perion Community’s (NASDAQ:PERI) monetary efficiency is spectacular for the reason that firm’s income development a number of instances outpaced the general digital promoting market growth in recent times. PERI’s profitability can also be increasing quickly, and the corporate has a clear steadiness sheet. Perion is an modern tech firm, and its enterprise mannequin appears extremely environment friendly. From the dangers perspective, potential traders must be conscious that Perion faces a considerable buyer focus danger. Alternatively, the inventory is round 52% undervalued and has demonstrated strong momentum over the past three months. General, I believe that PERI is an efficient funding alternative for danger takers and assign it a “Purchase” score.
Perion is a world, multi-channel promoting expertise agency offering built-in options throughout key digital promoting avenues akin to search, social media, show, video, and CTV promoting. All these channels intersect seamlessly inside Perion’s clever HUB (“iHUB”).
The corporate operates within the increasing digital promoting trade. I see a number of constructive shifts that may catalyze the trade’s sustainable development. Regardless of tight financial insurance policies throughout developed economies, the worldwide financial system remains to be anticipated to increase by 2.4% in 2024 and a pair of.7% in 2025. On account of the resilient broader financial setting, advertising budgets are additionally anticipated to increase and surpass $1 trillion in 2024. Moreover, The continuing international development towards digitalization is considerably impacting the promoting trade, with the share of digital advertisements anticipated to extend by roughly one share level annually. With all these strong tailwinds, I imagine that Dentsu’s current report forecasting above 6% CAGR for the digital promoting market is truthful.
From the above desk, we are able to see that the worldwide digital promoting market witnessed a sturdy 14.8% development in 2022, and projections point out a continued 6.3% year-over-year growth in 2023. Notably, Perion has surpassed the trade common, attaining a formidable 33.8% income development in 2022. Anticipated to keep up this momentum, PERI is forecasted for a exceptional 15.9% income development for the complete 12 months 2023, considerably outperforming the broader digital promoting market. Outpacing the broader market development is indicative of an organization’s potential to seize an growing share of the market, showcasing its competitiveness and attraction to advertisers. Wall Road analysts anticipate PERI’s income development to outpace the broader digital promoting in 2024 and 2025 as effectively.
The corporate’s potential to ship income development outpacing the trade averages is spectacular, however on the finish of the day profitability dynamics is a extra vital issue affecting the inventory value over the long-term. The chart under suggests a speedy growth of the working revenue, which outpaces the income development because the working margin additionally demonstrates a formidable upward trajectory. The free money circulation (“FCF”) has been risky, however the dynamic can also be constructive. One other fascinating constructive reality is that Perion’s headcount has grown by about solely 10% since 2019, whereas the working revenue has elevated by greater than 5 instances. This underscores the excessive effectivity of the corporate’s enterprise mannequin, which is nice for traders.
Perion’s steadiness sheet is wholesome, with a strong half-a-billion money place as of the newest reporting date. Debt ranges are additionally very low. Having a clear steadiness sheet and bettering profitability will increase the possibilities that Perion will proceed investing in development, and its R&D investments may even stay substantial.
Perion’s publicity to numerous digital promoting channels makes it a well-rounded strategic companion for shoppers. The corporate additionally supplies superior analytics throughout completely different advertising campaigns, channels, and screens. This possible creates superior worth by way of greater ROI for shoppers. Perion makes use of synthetic intelligence (“AI”) capabilities to create extra worth with its choices. The corporate’s SORT proprietary AI expertise even gained the Digiday Expertise Award in September 2023.
Additionally, listed here are a number of phrases relating to the upcoming This autumn earnings launch deliberate for February 7. With the a number of EPS upward revisions over the past three months, I look optimistic concerning the upcoming earnings launch. Wall Road analysts forecast an 11.5% YoY income development for This autumn and the EPS growth from $0.79 to $0.93. Based on the earnings historical past, Perion very not often misses consensus forecasts. Furthermore, in Q1-Q3 2023, Perion delivered double-digit YoY income development and notable EPS expansions. Subsequently, I’m optimistic concerning the upcoming earnings launch.
In conclusion, Perion emerges as a promising participant within the advert tech trade, putting substantial emphasis on buyer worth via innovation. The corporate’s strong monetary efficiency, surpassing the broader digital promoting market, means that its strategic deal with innovation and diversification throughout varied advertising channels is yielding vital advantages.
PERI reached its peak in April 2023 and is at present buying and selling at roughly a 40% low cost from final 12 months’s highs. Whereas it has underperformed the U.S. inventory market prior to now 12 months, current short-term momentum is noteworthy, with the inventory posting a acquire of practically 15% within the final three months.
To simulate the discounted money circulation (“DCF”) mannequin, I exploit a 12.3% WACC. The TTM FCF margin is eighteen.42%, which I anticipate to be increasing by 50 foundation factors yearly. I exploit a 19.6% projected by consensus income development for FY2024, however for the following three years, I exploit a ten% estimation, which is extra conservative than consensus expects. The fixed development price for the terminal worth (“TV”) calculation is a conservative 3%. There are round 47 million PERI excellent shares in the meanwhile.
The DCF mannequin supplies a fair proportion value of just about $46. That is considerably greater than the present share value and means a 52% upside potential. The valuation could be very engaging, however when the inventory is that undervalued, there is likely to be some crimson flags priced in. Subsequently, I’m transferring on to mitigating components.
Perion has a search promoting contract with Microsoft (MSFT), which accounts for greater than one-third of the corporate’s gross sales, in accordance with the newest annual report. The contract is efficient till December 31, 2024. There isn’t any information relating to the contract renewal but, which places a notable portion of the corporate’s income below substantial risk. Having a contract with Microsoft is a strong reputational asset, but it surely additionally creates vital focus dangers for Perion. There have been no updates from the administration relating to the contract renewal throughout the newest earnings name, which creates extra uncertainty for traders.
In Could 2023, Spruce Level Administration printed a complete 127-page report investigating the accuracy of Perion’s monetary stories. The report is publicly accessible; I cannot go into deep element right here. The report incorporates allegations that there is likely to be materials misstatements in Perion’s monetary statements, given its irregular profitability relative to trade friends, a notable decline in insiders’ possession, and potential inconsistencies between spectacular income development and the proportion of gross sales allotted to development (capex and R&D). The corporate’s exterior auditor is a widely known and respected firm, EY. Moreover, there was an official response from Perion, emphasizing that as a public firm, Perion is extremely regulated.
Perion is a extremely regulated NASDAQ firm that makes all required disclosures and takes all compliance measures.
The report’s launch had minimal impression on the inventory value, with the present worth remaining comparatively unchanged in comparison with the day the report was made public.
In my evaluation, Perion presents a compelling funding prospect with appreciable upside potential that seems to outweigh the perceived dangers. Regardless of the bearish report from Spruce Level Administration, Perion’s in depth high-profile consumer roster displays a dedication to sustaining a constructive popularity, which mitigates the danger of intentional monetary misstatements. With spectacular efficiency throughout key monetary metrics and favorable trade developments, Perion appears well-positioned to maintain its upward trajectory. The inventory deserves a “Purchase” score, significantly for traders in the hunt for a high-risk, high-reward alternative.