Roth MKM analyst Darren Aftahi thinks Direct Digital Holdings (Direct Digital Holdings Stock Quote, Chart, News, Analysts, Financials Nasdaq:DRCT) has more to give.
In a research update to clients November 27, Aftahi maintained his “Buy” rating on DRCT but raised his price target on the stock from $9.50 to $12.50. The analyst explained the reasoning behind the move.
“We believe there may be more of a “margin upside” story to DRCT than previously thought,” he said. “While the topline growth is unquestioned and superior to peers, we believe the market may not appreciate a potential longer-term improvement in adj. EBITDA margins. Currently, DRCT uses BidSwitch to connect it to various partners in the programmatic ecosystem. However, our recent conversations with DRCT’s management suggest that it could look to strike more direct deals over time. This would mitigate the need for a middleman and improve margins as a result. We have spoken with numerous players in the DSP and SSP space, who suggest direct deals could improve passthrough margins by an average of 200-500 bps. In the case of DRCT, we believe this would be pure margin dropping straight to the bottom line.”
The analyst thinks DRCT will post EBITDA of $14.7-million on revenue of $180.2-million in fiscal 2023. He expect those numbers will improve to EBITDA of $19.9-million on a topline of $240.6-million the following year.
“We are not adjusting any numbers at this time but do highlight that at the midpoint of this range (350 bps), this would imply an $8.4M benefit to adj. EBITDA (on our 2024 estimate), or a 42% benefit,” the analyst concluded. “We believe the company endeavors to shift traffic from BidSwitch (the underlying infrastructure that normalizes the connections between different programmatic technology platforms; most commonly DSPs and SSPs), however, this goal is more long-term in nature. Any upside to margins would make an already 40% 2-year projected CAGR in adj. EBITDA (ROTH MKM estimates) even better. With that in mind, we have re-evaluated the multiple we apply to DRCT shares. Peers trade at a mean ~9.1x EV/’24E EBITDA currently. With well above average growth, and the potential for an improved adj. EBITDA story longer-term, we apply a ~10x multiple to our ~$20M ’24 estimate, which implies a fair value of $12.50 per share, which is our new PT.”