Verve Group extensive report: Navigating the revived ad market with a new identity

The advertising market is recovering and so is Verve, as evidenced by the last two quarters of strong double-digit organic growth. We believe Verve has navigated the challenging advertising market witnessed in 2022-2023 well by maintaining a resilient margin profile and increasing its share of customers' advertising budgets. The acquisition of Jun Group brings a lot to the table, as it not only enables stronger margins and higher-quality earnings, but also expands Verve's data set and drives synergies. However, given the recent surge in the share price, we believe that the risk/reward ratio has moderated somewhat at the current market valuation. Consequently, we revise our recommendation to Accumulate (was Buy) while increasing the target price to SEK 29 (previously SEK 28).

An ad software media company that benefits from its own first-party data

Over the past few years, Verve Group has successfully transformed into a fully integrated ad software media company, marked by its name change from Media and Games Invest to Verve. Originally rooted in the gaming industry, the former name could suggest a pure focus on M&A driven gaming activities, but things have changed. The name "Verve" reflects the company's true identity, with 80% of its revenue coming from its advanced programmatic advertising software platform, which generates revenue through revenue sharing, commissions and platform fees. While the gaming division still plays a role, it now serves strategically as a valuable source of first-party data rather than a primary growth driver. Together with the company's SDKs, Verve collects a vast amount of first-party data, which is critical in a privacy-conscious world moving away from third-party cookies and identifiers. This data fuels Verve's proprietary ID-less targeting solutions, enabling rapid and efficient development and testing of new technologies, and positioning Verve to be highly agile and adaptable in the ever-changing digital advertising landscape.

Proven resilience in tough conditions and stands ready to leverage market rebound

The advertising market has been under pressure for the past two years due to rising interest rates, inflation, recessionary fears, geopolitical issues and supply chain disruptions, resulting in reduced advertising budgets and lower CPMs. Despite these difficulties, Verve maintained stable margins and achieved 5% organic revenue growth in 2023. While this might seem modest for a growth company of Verve’s caliber, it becomes more commendable considering that average CPMs dropped by 20-30% during the year. By maintaining a net dollar expansion rate of ~90% among its software customers, Verve was able to effectively increase its share of customer spend given the pricing dynamics, highlighting its strength in cross-selling and up-selling. What's more, Verve's customer base growth of +20% year-on-year positions the company well to benefit from a recovering advertising market and rising CPMs, supporting our 2024 revenue forecast of 21.7%, of which 13.9% organic, to 391.8 MEUR (2024e pro forma: 449.8 MEUR). For 2025, we estimate revenues of 481.9 MEUR, representing a growth of 23% year-on-year, of which 9% organic. However, near-term risks include economic volatility, geopolitical uncertainties and the ongoing phase-out of third-party cookies.

Valuation multiples are on the low side

The combination of an elevated leverage and falling growth momentum has been a bad cocktail in valuation manners for all growth companies in the current high interest environment, and Verve was no exception. The company is trading at historically low levels and based on our estimates, the 2025 multiples (adj. EBIT 6.4x and EV/FCF 10.9x) are somewhat compressed in our view, even in the current rate environment. The DCF model, which we believe better reflects the company's long-term value creation, points to an upside for the stock (SEK 31.9/share) and supports our positive investment view.