Verve Group Q2'24: Gaining market share

Verve's Q2 report did not present any major surprises given the previously announced earnings update in mid-August, though it highlighted some positive developments. Notably, while the report showcased improved cash flow conversion and retention rate, the company’s Capital Market Day also shared increased visibility regarding the company’s operations. It is evident that Verve has continued to take further market share in 2024, and the outlook remains strong. We reiterate our Accumulate recommendation and raise the target price to SEK 38 (previously SEK 35).

Strong retention rate and increased cash conversion

As the top and bottom line was already known ahead of the report, our primary focus was on cash flow, pricing trends, and key performance indicators (KPIs). Starting with the latter, Verve’s net dollar retention rate remained stable yet robust at 109% (Q1’24: 110%), indicating existing customers continue to spend more. However, the retention rate of 98% was particularly noteworthy, the highest in over three years, suggesting that Verve is retaining a larger share of its existing customer base. We believe this highlights strong industry interest and the enduring relevance of Verve's products, especially as privacy-centric trends continue to gain momentum, and the shift towards a world with fewer or no identifiers accelerates. In terms of cash flow, we view positively that Verve has managed to increase its cash conversion in recent quarters on a trailing twelve-month basis, underscoring solid working capital management.

Capital Markets Day highlighted positive trends

Verve’s Capital Markets Day (“CMD”) provided encouraging insights, particularly regarding pricing trends. As the Q2 report suggested, the company had experienced higher pricing points in Q2, evident from lower volume growth relative to total revenue growth. However, these higher CPMs were, according to the company, primarily company-specific rather than indicative of a broader market recovery. The drivers behind the higher pricing points experienced in Q2 were largely due to the scaling of new ad formats, such as full-screen and video ads. Verve expects that general CPMs will also rise throughout the remainder of 2024, which supports our FY2024 estimates. Regarding Google's cookie policy reversal announced in July, Verve acknowledged the uncertainties surrounding the new approach but stressed that the industry now fully recognizes the growing importance of privacy, which is set to become even more critical moving forward. Lastly, we were pleased to see Verve provide more insight into its operations, notably the progress with diversifying its ad revenue by entering new market segments as well as its growing market share on iOS devices, which helps alleviate some related uncertainties previously perceived.

Still room for an upside in the share price

While our earnings estimates remain largely unchanged, we have slightly increased our FCFF estimates. Based on our 2025 projections, Verve trades at an adjusted EV/EBIT of 6.8x and an adjusted EV/FCF of 10.6x. Although the EV/EBIT multiple is low in absolute terms, the adjusted EV/FCFF multiple is only marginally below the peer median (11.5x). We believe a multiple in line with peer (based on FCFF) is acceptable, especially when considering future prospects. With the integration of Jun Group, Verve is expected to not only improve its capital structure over the coming years, but also boost its FCFF, and outgrow peers in this area. This is reflected in the adjusted 2026 EV/FCF multiple of 9.5x, which is below the peers’ median (10.3x). Our DCF model, which we believe better captures the company’s long-term value creation, points to a potential upside for the stock at SEK 39.3 per share, further reinforcing our positive investment stance.