Direct Digital Holdings has price target cut at Roth

Following the appointment of a new auditor, Roth MKM analyst Darren Aftahi has maintained his “buy” rating on Direct Digital Holdings (Direct Digital Holdings Stock Quote, Chart, News, Analysts, Financials NASDAQ:DRCT), but has cut his price target on the stock.

On June 10, DRCT announced that it had appointed BDO USA as its new auditor.

“We are pleased to engage BDO as our new independent auditor,” CFO Diana Diaz said. “The firm has deep experience in the advertising technology sector, working with many of our peers across the industry. Their leading expertise and fresh perspective will be valuable assets as we continue executing our growth strategy and striving for excellence in financial reporting and corporate governance. Now with our new auditor, we look forward to returning to a normal cadence of quarterly and annual filings as soon as possible.”

The analyst gave his take on the development.

“DRCT appointed BDO as its new auditor. BDO’s experience with digital advertising companies should help address prior audit concerns around publisher revenue recognition,” he wrote. “BDO needs to audit DRCT’s FY23 financials to enable the delayed 1Q24 10-Q filing, likely aligning with 2Q24 deadlines in mid-August. The new auditor is a positive step toward regaining Nasdaq listing requirements, potentially as early as mid-August.”

In a research update to clients June 11, Aftahi maintained his “Buy” rating but lowered his price target on DRCT from $19.00 to $7.50. He explained the reasoning behind the move.

“The appointment of its new auditor is a step in the right direction, and we believe the selection of one chosen by numerous adtech peers should help ease any future concerns Marcum had around SOC-1 Type 2 reports for publishers,” he said. “While it will still take some time before DRCT becomes current, we believe the new auditor is the most essential step toward that goal, potentially as early as mid-August. While shares have taken a dramatic step down from prior fundamental valuation, we believe the stock should gain ground as milestones are hit including the filing of its 2023 10-K and 1Q24 10-Q, and regaining NASDAQ compliance. In the interim, shares may trade sideways. With that in mind, we are lowering our PT from $19 to $7.50, until we have more visibility on the fundamentals of the business in real-time. Our new $7.50 PT is based on ~10x EV/’24E adj. EBITDA of our estimate of $13.1M.”

The analyst thinks the company will post EBITDA of $13.1-million on revenue of $179.7-million in fiscal 2024. He expects those numbers will improve to EBITDA of $15.9-million on a topline of $202.0-million in fiscal 2025.