Surging Earnings Estimates Signal Upside for DoubleVerify (DV) Stock

DoubleVerify Holdings (DV) could be a solid choice for investors given its recent upgrade to a Zacks Rank #2 (Buy). This upgrade is essentially a reflection of an upward trend in earnings estimates -- one of the most powerful forces impacting stock prices.

The sole determinant of the Zacks rating is a company's changing earnings picture. The Zacks Consensus Estimate -- the consensus of EPS estimates from the sell-side analysts covering the stock -- for the current and following years is tracked by the system.

Individual investors often find it hard to make decisions based on rating upgrades by Wall Street analysts, since these are mostly driven by subjective factors that are hard to see and measure in real time. In these situations, the Zacks rating system comes in handy because of the power of a changing earnings picture in determining near-term stock price movements.

As such, the Zacks rating upgrade for DoubleVerify is essentially a positive comment on its earnings outlook that could have a favorable impact on its stock price.

Most Powerful Force Impacting Stock Prices

The change in a company's future earnings potential, as reflected in earnings estimate revisions, has proven to be strongly correlated with the near-term price movement of its stock. That's partly because of the influence of institutional investors that use earnings and earnings estimates for calculating the fair value of a company's shares. An increase or decrease in earnings estimates in their valuation models simply results in higher or lower fair value for a stock, and institutional investors typically buy or sell it. Their transaction of large amounts of shares then leads to price movement for the stock.

Fundamentally speaking, rising earnings estimates and the consequent rating upgrade for DoubleVerify imply an improvement in the company's underlying business. Investors should show their appreciation for this improving business trend by pushing the stock higher.

Harnessing the Power of Earnings Estimate Revisions

Empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock movements, so it could be truly rewarding if such revisions are tracked for making an investment decision. Here is where the tried-and-tested Zacks Rank stock-rating system plays an important role, as it effectively harnesses the power of earnings estimate revisions.

The Zacks Rank stock-rating system, which uses four factors related to earnings estimates to classify stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), has an impressive externally-audited track record, with Zacks Rank #1 stocks generating an average annual return of +25% since 1988. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Earnings Estimate Revisions for DoubleVerify

This software platform for digital media measurement and analytics is expected to earn $0.36 per share for the fiscal year ending December 2024, which represents a year-over-year change of -12.2%.

Analysts have been steadily raising their estimates for DoubleVerify. Over the past three months, the Zacks Consensus Estimate for the company has increased 22.9%.

Bottom Line

Unlike the overly optimistic Wall Street analysts whose rating systems tend to be weighted toward favorable recommendations, the Zacks rating system maintains an equal proportion of 'buy' and 'sell' ratings for its entire universe of more than 4000 stocks at any point in time. Irrespective of market conditions, only the top 5% of the Zacks-covered stocks get a 'Strong Buy' rating and the next 15% get a 'Buy' rating. So, the placement of a stock in the top 20% of the Zacks-covered stocks indicates its superior earnings estimate revision feature, making it a solid candidate for producing market-beating returns in the near term.

The upgrade of DoubleVerify to a Zacks Rank #2 positions it in the top 20% of the Zacks-covered stocks in terms of estimate revisions, implying that the stock might move higher in the near term.

Zacks Investment Research

Have you been paying attention to shares of Fortinet (FTNT)? Shares have been on the move with the stock up 17.3% over the past month. The stock hit a new 52-week high of $97.35 in the previous session. Fortinet has gained 66% since the start of the year compared to the 30.4% move for the Zacks Computer and Technology sector and the 31.1% return for the Zacks Internet - Software industry.

What's Driving the Outperformance?

The stock has a great record of positive earnings surprises, as it hasn't missed our earnings consensus estimate in any of the last four quarters. In its last earnings report on November 7, 2024, Fortinet reported EPS of $0.63 versus consensus estimate of $0.51.

For the current fiscal year, Fortinet is expected to post earnings of $2.15 per share on $5.87 billion in revenues. This represents a 31.9% change in EPS on a 10.74% change in revenues. For the next fiscal year, the company is expected to earn $2.20 per share on $6.57 billion in revenues. This represents a year-over-year change of 2.36% and 11.86%, respectively.

Valuation Metrics

Fortinet may be at a 52-week high right now, but what might the future hold for the stock? A key aspect of this question is taking a look at valuation metrics in order to determine if the company has run ahead of itself.

On this front, we can look at the Zacks Style Scores, as these give investors a variety of ways to comb through stocks (beyond looking at the Zacks Rank of a security). These styles are represented by grades running from A to F in the categories of Value, Growth, and Momentum, while there is a combined VGM Score as well. Investors should consider the style scores a valuable tool that can help you to pick the most appropriate Zacks Rank stocks based on their individual investment style.

Fortinet has a Value Score of D. The stock's Growth and Momentum Scores are A and A, respectively, giving the company a VGM Score of B.

In terms of its value breakdown, the stock currently trades at 45.2X current fiscal year EPS estimates, which is a premium to the peer industry average of 32.9X. On a trailing cash flow basis, the stock currently trades at 49.5X versus its peer group's average of 28.2X. Additionally, the stock has a PEG ratio of 2.58. This isn't enough to put the company in the top echelon of all stocks we cover from a value perspective.

Zacks Rank

We also need to consider the stock's Zacks Rank, as this supersedes any trend on the style score front. Fortunately, Fortinet currently has a Zacks Rank of #2 (Buy) thanks to rising earnings estimates.

Since we recommend that investors select stocks carrying Zacks Rank of 1 (Strong Buy) or 2 (Buy) and Style Scores of A or B, it looks as if Fortinet meets the list of requirements. Thus, it seems as though Fortinet shares could have a bit more room to run in the near term.

How Does FTNT Stack Up to the Competition?

Shares of FTNT have been soaring, and the company still appears to be a decent choice, but what about the rest of the industry? One industry peer that looks good is DoubleVerify Holdings, Inc. (DV). DV has a Zacks Rank of # 2 (Buy) and a Value Score of D, a Growth Score of B, and a Momentum Score of A.

Earnings were strong last quarter. DoubleVerify Holdings, Inc. beat our consensus estimate by 42.86%, and for the current fiscal year, DV is expected to post earnings of $0.49 per share on revenue of $662.74 million.

Shares of DoubleVerify Holdings, Inc. have gained 14.6% over the past month, and currently trade at a forward P/E of 55.56X and a P/CF of 30.4X.

The Internet - Software industry is in the top 21% of all the industries we have in our universe, so it looks like there are some nice tailwinds for FTNT and DV, even beyond their own solid fundamental situation.

Zacks Investment Research