AI Adoption And Cloud Migration Will Drive Strong Long Term Upside

Catalysts

About Alithya Group

Alithya Group is a digital transformation and high value consulting partner specializing in enterprise cloud platforms, AI enabled solutions and industry specific IP.

What are the underlying business or industry changes driving this perspective?

• Accelerating enterprise wide AI adoption is pushing large organizations to modernize core ERP and performance management systems, directly benefiting Alithya's niche in high end Microsoft, Oracle and EPM transformation projects and supporting sustained double digit revenue growth and expanding adjusted EBITDA.
• The rapid shift from legacy infrastructure to cloud platforms such as AWS, Microsoft and Oracle is driving demand for complex migration and modernization programs where Alithya already has proven methodologies and IP. This is creating a long runway for higher value project revenues and structurally stronger gross margins.
• Ongoing expansion of Smart Shore delivery centers and deliberate deal structuring with larger offshore components should continue to mix revenue toward higher margin work. This is driving consolidated gross margin improvement and supporting further upside in EBITDA and net earnings despite wage inflation.
• Deep specialization in resilient verticals such as health care, pharmaceuticals and process manufacturing, combined with proprietary industry accelerators like FoodXpress and Vital, positions Alithya to win larger, repeat engagements with existing clients. This is lifting cross sell revenue per customer and improving revenue visibility.
• Strengthening strategic partnerships with hyperscalers, highlighted by Tier 1 status and co developed AI agents with Oracle and strong recognition from Microsoft and AWS, is likely to steer a larger share of high complexity, AI rich implementations to Alithya over time. This is supporting premium pricing, higher net margins and compounding earnings growth.

Assumptions

This narrative explores a more optimistic perspective on Alithya Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Alithya Group's revenue will grow by 5.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -5.4% today to 12.0% in 3 years time.
• The bullish analysts expect earnings to reach CA$67.7 million (and earnings per share of CA$0.69) by about December 2028, up from CA$-26.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CA$54.6 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 8.0x on those 2028 earnings, up from -6.5x today. This future PE is lower than the current PE for the CA IT industry at 12.3x.
• The bullish analysts expect the number of shares outstanding to grow by 0.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.27%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The strategic shift away from lower margin Canadian government contracts has already contributed to a 7.4% year over year revenue decline in Canada. If higher value replacements arrive more slowly than planned or government spending remains structurally weaker, overall top line growth and operating leverage could fall short of expectations, putting sustained pressure on revenue and earnings growth.
• Despite improving operations, the company still recorded a net loss of 31 million in the quarter driven by a 38 million non cash impairment across key cash generating units. If further repositioning or weaker than anticipated demand in Quebec, industry solutions or international markets is required, additional write downs and restructuring could emerge as a recurring feature, weighing on net earnings and investor confidence.
• SG&A expenses are rising faster than revenues, up 20.8% year over year versus 11.5% revenue growth. As the business scales its Smart Shore centers, acquisitions and AI investments, sustained wage inflation, integration costs and higher share based compensation could outpace margin gains from higher value projects, limiting the improvement in adjusted EBITDA margins and net margins over time.
• Bookings and book to bill ratios are being pressured by longer sales cycles and large engagements being broken into smaller phases. If macro uncertainty persists or intensifies, this pattern could become a structural feature of the market, leading to lumpier demand, weaker visibility and potential slowdowns in organic growth, ultimately constraining revenue momentum and future earnings expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Alithya Group is CA$4.0, which represents up to two standard deviations above the consensus price target of CA$3.34. This valuation is based on what can be assumed as the expectations of Alithya Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$4.0, and the most bearish reporting a price target of just CA$2.85.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be CA$566.4 million, earnings will come to CA$67.7 million, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of CA$1.73, the analyst price target of CA$4.0 is 56.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.