Analyst Insights

Citi Revises Ziff Davis Price Target Amid Advertising Headwinds

Citi revises Ziff Davis' price target down to $52, citing lower Q2 revenue forecasts and advertising challenges

By Harrison Wall

7/10, 23:27 EDT


Stock Rating: Neutral
Revised Price Target: $52.00
Previous Price Target: $62.00
Stock Price (July 10, 2024): $46.51

Summary Points

  • Ziff Davis pre-announces lower Q2 metrics, with Citi revising total revenue forecast to $326.9M due to advertising headwinds.
  • Citi maintains Neutral rating on Ziff Davis, adjusting price target to $52 based on DCF model and 2025 estimated multiples.
  • Despite advertising challenges, Ziff Davis' subscription business shows resilience, providing stability to the company's financial outlook.

Ziff Davis Pre-Announces Lower 2Q Metrics

Ziff Davis, Inc. (ZD.O) has pre-announced certain second-quarter metrics that fall below consensus estimates, according to a recent equity research report by Citi. The report highlights that the company is facing headwinds in its advertising revenue, which has led to a downward revision of its total revenue forecast for the quarter. The main takeaway from this announcement is the softer-than-expected performance in the advertising segment, which has prompted Citi to adjust its revenue estimates for the upcoming quarters as well.

Revised Price Target and Neutral Rating

Citi has maintained its Neutral rating on Ziff Davis but has revised its price target to $52 per share. This valuation is based on an even weighting of a discounted cash flow (DCF) model, a 2025 estimated EV/EBITDA multiple of 5.5x, and a 2025 estimated P/E multiple of 7.0x. The revised price target reflects the current challenges in the advertising market and the company's balanced portfolio of assets. "We rate Ziff Davis Neutral as we are balanced on Ziff Davis' portfolio of assets (55% advertising, 45% subscription)," the report states, emphasizing the mixed performance across different segments.

Advertising Revenue Headwinds

The primary driving factor behind the revised estimates is the underperformance in advertising revenue. Citi has lowered its 2Q24 total revenue estimate to $326.9 million, a modest 0.3% year-over-year increase, down from the previous estimate of $333.4 million. Advertising revenue estimates have been reduced to $172.7 million, a 1.4% year-over-year decline, compared to the earlier estimate of $179.1 million. This adjustment is significant as it contrasts with the consensus estimates of $334.1 million in total revenue and $177.0 million in advertising revenue. The report notes, "While Ziff Davis only mentioned headwinds to 2Q24, we do lower our 3Q24 and 4Q24 advertising revenue estimates slightly which lowers our total revenue forecast to $1.409B (+3.3% Y/Y) from $1.429B (+4.8% Y/Y)."

Subscription Business Stability

Despite the challenges in the advertising segment, Ziff Davis' subscription business has shown resilience. The subscription segment, which accounts for 45% of the company's revenue, has performed better than expected, providing some stability to the overall financial outlook. The report assumes a continuation of the positive trends observed in the first quarter for the subscription business. This balanced performance across segments is a key factor in maintaining the Neutral rating. "We note Ziff Davis' management's strong M&A track record and success at executing their roll-up strategy but M&A has been more muted of late," the report adds, highlighting the company's strategic strengths and current challenges.

Valuation and Future Outlook

Citi's valuation of Ziff Davis at $52 per share is derived from a combination of a DCF model with a 10.2% weighted average cost of capital (WACC) and a 2% terminal growth rate, alongside 2025 estimated EV/EBITDA and P/E multiples. The valuation reflects the company's growth rate and is in line with its peer group. However, several risks could impact this valuation, including the cyclicality of the advertising market, competition within digital media properties, and the scalability of the cybersecurity business. On the upside, a better-than-expected advertising market or successful execution of the new cybersecurity strategy could positively influence the stock price.

Citi remains cautious but balanced in its outlook for Ziff Davis, acknowledging both the potential and the challenges ahead. "We rate Ziff Davis Neutral as we are balanced on Ziff Davis' portfolio of assets (55% advertising, 45% subscription)," the report concludes.