Beacon chops price target on VerticalScope

VerticalScope Holdings (VerticalScope Holdings Stock Quote, Chart, News, Analysts, Financials TSXV:FORA) is feeling the impact of a tough first quarter, prompting Beacon Securities analyst Gabriel Leung to cut his price target to $8.50 from $12.00 as digital ad headwinds, weaker margins and search traffic declines weigh on near-term growth expectations.

He is maintaining his “Buy” rating.

The company reported Q1 revenue of US$13.6 million and EBITDA of US$3.6 million, missing the analyst’s expectations of US$13.4 million in revenue and US$4.9 million in EBITDA. Digital advertising revenue was down 7.8% year-over-year to US$11.5 million, while e-commerce revenue fell 8.2% to US$2.1 million. Adjusted EBITDA margins declined from 36.8% to 26.8%.

“As expected (based on the company’s April 8th corporate update), Q1 was a challenging quarter with revenues down 8% y/y and EBITDA down 30% y/y,” Leung said in his May 14 Investors note on quarterly results, pointing to several key drivers.

Those included weaker performance in higher-margin programmatic video ads “stemming from changes to classification of ads resulting in decreased bidder activity and lower CPMs,” as well as “a slower start for direct advertising due to timing-related shifts in campaign launches” and “the impact of Google’s March core algorithm update, which affected organic traffic to VerticalScope’s communities.”

Monthly active users dropped to 103.9 million, down 7.8% year-over-year, while ARPU remained flat at $0.044. Free cash flow also fell sharply, down 39.6% year-over-year to US$3.12 million.

Despite the disappointing results, VerticalScope continues to invest in its platform and diversify away from its dependence on search traffic.

“VerticalScope continues to improve its platform by optimizing its strategy for dealing with Google AI Overviews by integrating its own AI-driven enhancements to improve engagement (i.e. faster, better results in native languages), accessibility and monetization,” Leung said. “FORA is also placing more emphasis on driving direct traffic via its mobile app and investing in newsletter email campaigns (all of which should help reduce reliance on search traffic going forward).”

Leung now thinks that VerticalScope will do $20.6-million in Adjusted EBITDA on revenue of $61.6-million in fiscal 2025. he thinks those numbers will improve/deteriorate to $21.7-million on revenue of $64.3-million in fiscal 2026.

The company maintained its full-year guidance for 2025, including EBITDA of US$21–24 million and FCF of US$20–22 million. Still, Leung revised his estimates and valuation to reflect a more cautious outlook.

“We had adjusted our estimates to reflect the Q1 results and have also lowered our target multiple to 8x (was 9x) to reflect some of the company’s near-term growth challenges,” the report said. “As a result, we are lowering our target price to C$8.50 (was $12.00).”

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