TLDR

• Despite the recent share price decline, there is still a lot of hope built into the current share price. To generate a reasonable risk-adjusted return, the current price assumes the company can sustain 15% growth over the next 5 years and hit a high NPAT around 8%. That might be achievable, but it is a big ask.
• The current market cap around $100m is pretty generous for a company still generating a statutory loss, with revenue fairly flat over the last 3 years, facing existential risk with technology transformation.
• I think a more likely outcome is around 10% pa growth, reaching 6% NPAT in FY30. With a still generous PE of 20, that’s a market cap in 5 years of $128m. That’s not a lot higher than the current market cap of $106m, especially factoring in share dilution over the next 5 years.
• At current share price ($0.53 at time of writing), I get an expected and disappointing ROI of 4% pa over the next 5 years.
• Applying a 15% discount rate (needed, I believe, to justify AI-Media’s size, risk and illiquidity), and weighting across bull and bear scenarios, I get a current fair price of $0.32. Or if I use a 10% discount rate, a fair price around $0.40.
• I realise I’m at odds with the current high valuations from others on Strawman. But based on my expectations and perceived risks, I have to call the company a Sell. I’ll maintain my current small holding until the FY25 results come out. But unless they boost my confidence, I’ll then back out.

Bull case

• AI-Media is in the middle of an aggressive transformation from services to technology-driven solutions.
• Despite being a long-established business (22 years), the company has shown impressive willingness to cannibalise its old service-heavy operating model and experiment rapidly with emerging AI technologies. AI-Media may be an early strong example of the transformational power of AI.
• The business appears to be at a profit inflection point. Statutory losses were substantially reduced in FY24 and the business now has positive operating cashflows which will grow quickly with increasing high-margin technology solutions.
• Cash was up $3.6m in FY24 and another $3.3m in H1FY25. 
• Has no meaningful debt.
• We’re starting to see the wisdom behind the purchase of EEG in 2021. Being the market leader in encoders looks like a huge advantage for growing market leadership in transcription.
• Its 22-year successful history in the industry gives AI-Media a strong footprint, network and positive reputation.
• There has been a swag of products released in the last couple of years under the Lexi brand (eg, Recorded, Disaster Recovery, Voice Brew). Also, the iCap cloud platform, used by all major industry players has now been monetised, generating revenue from all 3rd party users. 
• AI-Media can capitalise on the rapidly growing power of AI, without the capital costs of developing AI models or locking into a single AI model. As AI models improve, AI-Media can switch models to ensure the best outcomes.
• Tony has an aspirational target of $150m in revenue (vs $66m in FY24) and $30m EBITDA in FY29 (vs $4m in FY24 and $4m also forecast for FY25). Getting only 75% of the way to the FY29 EBITDA target will produce a healthy ROI for investors.
• At the recent InfoComm 25 conference (a massive international conference) AI-Media won 4 “best in show” awards as well as a “best AI solution” award.
• AI-Media has been working with some great customers and partners. Amazon, with all its AWS AI grunt, uses AI-Media for its own event broadcasts, openly spruiking the benefits of AI-Media in a LinkedIn article, posting images of EEG/iCap encoders, and explaining how they are going to expand their transcription offerings at subsequent events.
• Tony, the CEO, is a passionate and knowledgeable advocate for the business; he is a strong communicator and networker.
• While cheap and free transcription services are ubiquitous, there is still a business case for clients paying for a market leading provider to deliver these technologies to ensure maximal security, redundancy, speed, accuracy, tailoring to unique contexts, installation, oversight, etc.
• Valuation:
• I think we should take Tony’s FY29 targets with a large grain of salt. Even he is calling these “aspirational”. But let’s say he can achieve 75% of these targets. So let’s assume FY25 revenue is flat at $66m (given H1FY25 showed a small decrease), with 5-year revenue CAGR around 14%, NPAT of 8% and terminal PE of 25. That gives an FY30 market cap around $260m.
• I’ll allow for 15% dilution along the way (there is already 5% dilution locked in from retention incentives; it seems reasonable to assume another 10% for incentives, acquisitions or just financial support across 5 years).
• That will give an ROI around 15% pa over the next 5 years.

Bear case

• The transformation case for AI-Media is not yet proven. H1FY25 revenue declined marginally as lower-revenue technology solutions cannibalised previous higher-revenue services. Guidance is that EBITDA for FY25 will match FY24. This lack of short-term growth in revenue and margins doesn’t provide great confidence in the ability of the business to achieve its long term aspirational targets.
• The recently introduced generous retention schemes for the CEO and key leaders, with no performance contingencies attached, seem excessive and not well justified.
• The Board members are excessively paid for the size and success of the company, with the Chairman earning around $150k and other Directors around $100k.
• Based on publicly available demos, the AI-only live transcription models are of questionable quality. The better demos still involve some level of human input in the form of oversight of AI output and/or context-specific tweaking of the AI-models. I’d like to see higher quality AI-only demos to develop greater confidence in the product on which the future of the company depends.
• If the AI-Media models aren’t yet strong, and don’t improve quickly, AI-Media will still rely on human-based captioning and won’t hit its target of 80% technology solutions by Dec 2025. In which case it won’t be on track to hit anywhere near its ambitious FY29 targets of $150m revenue and $30m EBITDA.
• I don’t understand how some of the reported statistics match the financial measures. Eg, Tony has said output has increased from 1 million minutes in 2020 to 120 million minutes in 2025. How does this reconcile with revenue roughly doubling in that time (and flat over the last 3 years)? Why has 120x in output resulted in only 2x in revenue and still unprofitable? Perhaps the result of an extremely competitive market? Is the increased output much lower quality and hence worth less? Seems like customers have benefitted much more than AI-Media from the technology transition.
• The technology for transcriptions and translation is changing rapidly. It is possible that the value delivered by AI-Media gets captured by other big or small providers, or gets commoditised into a low or negative margin offering. The ultimate test of whether AI-Media delivers unique value will be shown when it can grow revenue, which right now it isn’t doing.
• Valuation:
• H1FY25 results weren’t overly inspiring for growth, with revenue and EBITDA declining. We could see FY25 results largely mirror FY24 results. The financial boost Tony is spruiking may be harder to achieve than expected. It’s possible that revenue growth is a sluggish 5% pa over the next 5 years (which will be better than it has achieved over the last 3 years).
• With slower growth, and a higher than desired percentage of revenue coming from services, margins will be slow to improve. Perhaps they achieve 4% NPAT in 5 years.
• With a terminal PE of 12, that’s a market cap of $40m in 5 years, less than half what it is today.
• Assuming 15% dilution along the way, that gives an ROI of -21% pa over the next 5 years.

Base case

• Valuation:
• Assuming the future is somewhere between the above bull and bear cases, I’ll guess 10% pa growth over the next 5 years. With a still-healthy NPAT of 6%, and a solid PE of 20, that’s a market cap of $128m in FY30.
• Allowing for 15% dilution, that will be 0% ROI pa over the next 5 years.
• Given a slight asymmetry in the bull and bear scenarios, when weighting across scenarios, I get a slightly higher $156m market cap in 5 years, giving 4% ROI pa.
• Given the size, risk and illiquidity of AI-Media, I’d want 15% return. If I use this as my discount rate, I get a fair current price around $0.32. I know others like using a standard 10% discount rate, in which case the fair price is $0.40.
• I have to admit I was disappointed when I ran these numbers. I am intrigued by AI-Media, and had started accumulating a position while I was doing my research on the company. My instinct was that it presented a good opportunity.
• But in reality, despite the recent share price decline, there is still a lot of optimism built into the current share price. At the current price, to achieve a 15% pa return over the next 5 years (a return that I think is the threshold to justify the risk), the company has to grow at 15% pa, reach an impressive NPAT of 8%, be granted a PE of 25, and not dilute more than 15%. Those are lofty expectations, especially given the current lack of growth.
• AI-Media is a $100m company that is still running at a statutory loss with revenue fairly flat over the last 3 years.
• Despite having recently started accumulating AI-Media, based on the above numbers I have to call the company as a Sell. In reality, I’ll hold until the FY25 financials come out. If the results increase my confidence in my bull case, I’ll continue to build. If not, I’ll wind down.