At the end of November 2021, publisher Future (FUTR) had a market value of £4.5 billion and looked as if it could soon qualify for the FTSE 100 index.

However, during the past six months the market has been less enthusiastic about paying a high rating for fast-growth stocks, a group which includes Future. This shift in investor behaviour has seen Future’s share price fall by 49% year-to-date.

Given Future’s robust record of profitability, cash generation and progressive dividend policy the extent of the share price decline suggests additional concerns.

Recent results from Google’s parent company Alphabet (GOOG:NASDAQ), specifically its YouTube operation, might suggest the digital advertising cycle is near its peak.

Moreover, the ability of Future to entice consumers to acquire products through its affiliate partners may become progressively more difficult in an economic environment where consumers’ finances are increasingly constrained.

However, there are good reasons why the group could prosper longer term.

HOW IT MAKES MONEY

Future has a large portfolio of magazines and websites. It creates interesting content such as information about cycling, photography or music which compels the reader to click on links to buy related products. It then receives commission on sales. Other sources of income include advertising, subscriptions, newsstand sales and events.

The company has market leading positions in the UK and US in content about technology, and depth and strength in video gaming. However, it’s still early days in terms of profiting from women’s lifestyle interests, fashion and beauty, homes, health and wellness, and financial services.

There is a large opportunity for the group if it can grow and monetise the audience in these categories on both sides of the Atlantic.

To achieve this, Future is trying to replicate the journey it has taken with the technology vertical by targeting areas where research is done online and where there is a high intent to purchase.

For example, it is pushing hard on the homes market. This encompasses interior design and products from home security and kitchen technology to white goods and services.

The acquisition of TI Media in April 2020 for £140 million has enabled the group to move into the home and women’s lifestyle segments with brands including Country Life and Women and Home. Future also owns popular magazines Homes & Gardens and Ideal Home.

Financial services could be a key growth driver for the group. The £594 million takeover in February 2021 of GoCo, the parent company of comparison website GoCompare, has been instrumental in developing the group’s e-commerce and financial services capabilities. The deal also brought energy savings service Look After My Bills into its portfolio.

ALL ABOUT THE CLICKS

The sales Future derives from people clicking links to products recommended in its articles have become one of its core sources of income.

Future’s proprietary technology automatically adds links to products from affiliate sellers with whom it has agreed revenue sharing agreements. These are updated based on availability and price.

If inventory is low or delayed, Future will receive advance notice. This is a valuable tool for content writers who will only cover products that are available at the time.

On an average day, Future’s readers buy approximately 43,500 items as a result of clicking on links in its articles.

The company’s proprietary e-commerce platform known as Hawk has proved critical in the group’s success. It keeps track in real time of inventory stock levels from its multitude of affiliate partners including Amazon (AMZN:NASDAQ), Walmart (WMT:NYSE) and Best Buy (BBY:NYSE).

Affiliate commerce has been a key driver of earnings growth. E-commerce revenue grew 36% to £216 million in 2021, making it the group’s fastest growing division.

ACQUISITION BENEFITS

Acquisitions have been an integral part of the Future success story. There are often two clear drivers behind its acquisition strategy. Deals invariably bolster a vertical that the group is already in or provides editorial expertise and reach in a new category.

Future’s acquisition of digital entertainment publisher CinemaBlend in 2020 increased its digital audience by over 19 million unique users per month and enabled the group to start signing advertising deals with streaming vendors and Hollywood studios.

Marie Claire was acquired in May 2021 and although it had been engaged in affiliate e-commerce for some time, its success and offering greatly benefited from using Future’s Hawk platform, which enabled a more user-friendly shopping experience by integrating numerous links for where to make purchases.

Video is another area where acquisitions have boosted the group’s scale and scope in a rapidly growing segment. For example, Future acquired Barcroft Studios in November 2019 for £23.5 million. Subsequently the asset has been renamed Future Studios and has added video creation to Future’s production capabilities. Video accounted for 5% of Future’s group revenue in 2021.

VIDEO IS HIGHLY LUCRATIVE

Video advertising generates four times the yield of display advertisements. Future uses data to ensure relevant videos are created and placed on its own websites. This involves monitoring search terms and audience traffic.

The percentage of page views that resulted in a video being watched rose by 6% between October 2020 and January 2022.

Future’s digital advertising yields jumped by 9% from the first to the second half of 2021. This was due to an increase in the proportion of direct marketing campaigns, coupled with an increase in video advertising that now accounts for 12% of all digital advertising.

INVESTMENT IN VIDEO REFLECTS GROWTH POTENTIAL

Future intends to create a content hub in Atlanta. There are also plans to create more videos in the women’s lifestyle, home and living verticals.

Its video content is published on all major social media sites including YouTube, Facebook and Snapchat which combined have millions of users.

The company strives to have endemic advertisers, and that is why it is in specialist content as opposed to more generalist sectors. 

According to Shore Capital analyst Roddy Davidson, Future is forecast to generate £290 million of earnings before interest, tax, depreciation and amortisation and 160p of adjusted earnings per share in 2022.

At £19.26 the shares trade on 12 times forward earnings. The rating is attractive given its potential to deliver organic upgrades and make further acquisitions that are earnings-enhancing.

While sentiment is currently weak towards the stock, one must consider a lot of bad news about a potential slowdown in affiliate revenue growth is already priced in.

The publication of half-year results on 18 May should give a better idea of how Future is coping in the current environment. We would be inclined to say the shares are worth buying if there is no bad news in this announcement.

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