LivePerson (NASDAQ:LPSN) shares surged to all time highs in early August after the AI conversational commerce company reported strong beat-and-raise second-quarter numbers which broadly underscored the long-term bull thesis on LPSN stock.
In short, revenues rose 29% in the quarter – topping expectations on the back of both strong customer growth (47 new customer contracts signed in the quarter) and existing customer spend growth (25% growth in average revenue per customer). Operating margins rose more than 15 points year-over-year, and hit a multi-year high as robust revenue growth drove positive operating leverage. And management expects all of this to continue, calling for 20%-plus revenue growth in both Q3 and Q4, alongside sustained margin expansion.
Broadly speaking, the quarter underscores that LivePerson is at the epicenter of an enormous pivot from legacy voice to automated messaging in business-to-customer (B2C) communications.
This pivot will persist with robust momentum over the next several years. Thanks to its reach, data, technology and platform advantages, LivePerson should sustain leadership in this secular growth market for the foreseeable future.
So long as this remains true, LPSN stock will remain one of the best stocks to buy and hold for the next five to 10 years. Here’s a deeper look.
AI Messaging is the Future
There is an enormous pivot happening right now in B2C communications from legacy voice calls to AI messaging.
In short, consumers used to call businesses, and businesses used to call consumers. That’s because the phone was simply the most ubiquitous communication platform, and the easiest way for businesses and customers to communicate.
That’s no longer true.
Digital messaging has replaced phone calls as the most ubiquitous communication method in the world. Roughly 100 billion messages are sent every day on on WhatsApp, Instagram and Facebook, and 13 million texts were sent every minute in 2018. Plus, young consumers open and reply to texts at a significantly higher rate than they open and reply to emails or calls.
So, if businesses want to reach customers, they need to adopt digital messaging.
Indeed, businesses that are doing this are already seeing a huge lift in contacts, customer satisfaction and conversions. According to LivePerson, companies who switched to messaging as their main form of customer communication reported a 20% rise in customer satisfaction, and a 20% rise in sales conversions.
Those are big jumps. Big enough that, inevitably, every customer-facing business in every industry in the world is going to pivot to messaging.
And not just regular messaging. But AI-powered, automated messaging, which leverages dialogue data and complex machine learning algorithms to create AI chatbots that have a statistically superior chance to increase customer satisfaction and sales conversions.
Big picture: legacy phone calls are out. AI-powered, automated messaging is in. This pivot is just starting today, and LivePerson is at the center of it all.
LivePerson Is the Leader
LivePerson is the leader in the AI-powered conversational commerce market today, and projects to remain the leader for the foreseeable future.
That’s thanks to three huge competitive advantages.
First, size. In this space, size matters, because greater reach equals greater brand awareness. Greater brand awareness promotes new customer sign-ups. And a strong pipeline of new customer sign-ups only increases reach. Lather. Rinse. Repeat.
Thus, as the biggest player in this space, LivePerson is in favorable position to leverage superior brand equity and awareness to drive consistently strong new customer growth.
Second, data. When it comes to powering AI chatbots, data is everything. The more data you have, the better the chatbots. LivePerson has the most data in this space. By far. In the second quarter alone, LivePerson ingested over 100 million individual messages per month into the company’s intent analytics engine.
Thus, as the company with the most messaging data in this space, LivePerson projects to continue to make the market’s best AI chatbots.
Third, new products. LivePerson is miles ahead in this space. The company is launching innovative new products before others have even entered the space. Case-in-point: LivePerson’s new Conversational Cloud platform. This is essentially an all-in-one platform where customers create, edit and manage their AI-powered communications.
Net net, LivePerson isn’t just the biggest player in the huge growth conversational commerce market today – the company projects to lean into big competitive advantages to remain the leader for a lot longer, too.
LPSN Stock Has Upside Potential
According to my numbers, LPSN stock has huge upside potential over the next 5+ years.
Here are those numbers.
Management estimates LivePerson’s total addressable market at $60 billion. Revenue this year project to be just $360 million. So LivePerson is presently tapping into less than 1% of its addressable market. That number will rise over time. It will be powered by a combination of sustained double-digit customer growth and double-digit average spend per customer growth.
Assuming so, I see LivePerson growing revenues at a 15%-plus compounded annual growth rate to more than $1.6 billion by 2030. Alongside 15%-plus compounded revenue growth, positive operating leverage should drive meaningful profit margin expansion. I see operating margins rising toward the 30% range by 2030.
My modeling suggests that 30% operating margins on $1.6 billion in revenues will lead to $4 or more in 2030 earnings per share.
This is an application software stock. Application software stocks tend to trade around 35-times earnings. Based on that multiple, $4 in 2030 earnings per share implies a 2029 price target for LPSN stock of $140.
That’s almost triple the LPSN stock price today.
Bottom Line on LPSN Stock
LivePerson is a long-term winner. The company’s recent strong earnings report confirms as much.
LPSN stock isn’t fully priced. Yet. Instead, shares still have enormous upside potential over the next five to 10 years.
So stick with the rally in LPSN stock. Buy more on dips. And let secular tailwinds drive shares way higher in the long run.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not own a position in any of the aforementioned securities.