Perion Networks: Recent Weakness Provides Better Buying Opportunities

Investment thesis

My initial bullish thesis about Perion Network (NASDAQ:PERI) did not age well over the last quarter since the stock price declined by almost 30%, much deeper than the broader market. Today, I would like to update my analysis to demonstrate that Stick has become an even more attractive investment opportunity after the recent weakness in the stock price. Fundamentals remain strong as the company continues demonstrating stellar revenue growth and profitability metrics expansion. My valuation analysis suggests that the stock is more than twice undervalued, and the company's balance sheet is a fortress. All in all, I upgrade PERI's rating to "Strong Buy".

Recent developments

The latest quarterly earnings were released on August 2, when the company topped consensus estimates. Revenue momentum demonstrated resilience as the YoY growth accelerated to 21.7%. The strength in revenue allowed the operating margin to expand substantially from 14.9% to 19.3%. As a result of the expanded operating margin and improved working capital management, the company's free cash flow [FCF] for the quarter almost tripled on a YoY basis.

The latest quarter's financial performance enabled the company to strengthen its financial position further. Near-term liquidity is in excellent shape, with almost no outstanding debt. The company is in a strong, almost half-billion-dollar net cash position, which makes it well-positioned to finance further growth organically or via acquisitions.

Strong revenue growth momentum is expected to be sustained. The upcoming quarter's earnings release is scheduled for November 1, and the top line is projected by consensus to demonstrate a 16% YoY growth. The profitability is poised to follow as the adjusted EPS is expected to expand from $0.53 to $0.74.

Overall, the company has demonstrated impressive growth momentum for 12 straight quarters of double-digit YoY growth. Profitability metrics are also expanding at a rapid pace, and five upward EPS revisions during the last 90 days suggest that the momentum is still strong. The TTM operating margin chart looks like a straight line demonstrating impressive growth.

The strength in profitability is primarily fueled by impressive revenue growth. It is also important to keep in mind that we are currently navigating a very challenging environment of cutting advertising budgets and tight monetary policy. But Perion's topline growth demonstrates strong resilience and multiple times outperforms the domestic and international markets.

The company's ability to outperform the digital advertising industry across several segments is a vital bullish sign. It indicates Perion's competitive strength and ability to capture market share while maintaining increasing profitability metrics. I also like the company's strategically diversified business model, which allows flexibility in the current uncertain environment. The fact that the management recognizes the need to innovate is also a good sign for potential investors. The focus on retail media as an essential growth driver enables the company to leverage data and AI to deliver personalized ad experiences, which creates more value for Perion's customers.

Last but not least, the fact that during the latest earnings call, the management raised its full-year guidance, with a projected 16% YoY growth in revenue at the midpoint and a 26% YoY growth in adjusted EBITDA, is a clear expression of confidence in future performance.

Valuation update

This year, the stock significantly underperforms the broader U.S. market with a less than one percent price increase. Seeking Alpha Quant assigns the stock a decent "B" valuation grade because most of the ratios are significantly lower than the sector median and historical averages.

PERI is an aggressive growth company, so the discounted cash flow [DCF] simulation is the option to proceed with. Given the latest Fed's hawkish rhetoric, I use an elevated 12% WACC for discounting. I use the flat 16.6% TTM FCF margin for the whole next decade. I have revenue consensus estimates available for the upcoming three full fiscal years and project a 5% CAGR for the years beyond.

According to my DCF simulation, the business's fair value is approximately $3.1 billion, more than twice the current market cap. The stock is substantially undervalued, and my target price is about $65 per share.

Risks update

The stock experiences weak momentum, softly speaking. Compared to the S&P 500 index, PERI underperforms across all short-term horizons, and there is little certainty regarding the timing of the sentiment pivot toward the stock.

I have firm conviction regarding the business's high quality and substantial stock undervaluation, but it is the stock market that moves the price. It might take multiple quarters before investors recognize the value of the stock, and the demand for it will go up, spurring up the price. That said, potential Perion investors should be ready to hold the stock for the long term and ready to stomach substantial volatility and near-term underperformance compared to the broader market.

As a growth company, Perion's stock also faces a substantial risk of massive sell-offs in case of underperforming compared to consensus estimates. Valuation significantly depends on future cash flows, and if there is a little hint that future profits are at risk, it might lead to investor panic even if the weakness is temporary and not secular.

The recent developments in the Gaza Stripe, which resulted in a military conflict between Israel and Hamas, are also a substantial risk for Perion, which is headquartered in Israel. Although the military capabilities of the two sides may appear unequal, with Israel possessing one of the world's most technologically advanced armies, the potential for a military conflict poses risks, both in terms of physical security and economic stability, for all individuals and entities located in close proximity to the conflict's epicenter.

Bottom line

To conclude, Perion is a "Strong Buy" at this stock price level. My valuation analysis suggests that the stock is more than two times undervalued, even under fairly conservative assumptions. The company's financial performance demonstrates strong momentum as the revenue demonstrates double-digit YoY growth in 12 quarters in a row, and the TTM operating margin chart looks like a straight line directed up. The balance sheet is a fortress, meaning the company has enough resources to fuel further growth.