AI-Led Enterprise Transformations And Smart Shoring Will Reshape This Undervalued IT Services Player

Catalysts

About Alithya Group

Alithya Group is an IT and digital transformation services firm focused on enterprise applications, cloud and AI driven solutions for large organizations.

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

• Enterprise clients are consolidating data and modernizing ERP platforms to roll out AI at scale. This aligns with Alithya's focus on enterprise application and transformation services and can support revenue growth and higher gross margins as more projects lean toward complex, high-value work.
• Growing adoption of cloud infrastructure, including migrations to providers such as AWS, creates demand for repeatable cloud migration and modernization projects. This can support higher utilization, stronger gross margins and more stable earnings.
• Increased interest in applied AI and agents from large software vendors, with Oracle selecting Alithya as a Tier 1 partner for Fusion Cloud AI agents, can deepen partner-led deal flow and support premium pricing. This ties directly into gross margin expansion and adjusted EBITDA.
• Rising use of offshore and smart shoring delivery, already at more than 13% of the workforce with a stated intent to include an offshore component in every proposal, can gradually lower delivery costs and support sustained improvement in consolidated gross margins and net margins.
• Sector specific digital modernization in health care, financial services and process manufacturing, supported by Alithya's proprietary IP such as FoodXpress and Vital, can lift project sizes and cross sell potential. This is likely to influence revenue growth, adjusted EBITDA and cash flow generation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Alithya Group's revenue will decrease by 4.1% annually over the next 3 years.
• Analysts are not forecasting that Alithya Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Alithya Group's profit margin will increase from -9.0% to the average CA IT industry of 11.4% in 3 years.
• If Alithya Group's profit margin were to converge on the industry average, you could expect earnings to reach CA$46.3 million (and earnings per share of CA$0.71) by about August 2029, up from -CA$41.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$61.1 million in earnings, and the most bearish expecting CA$3.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 2.8x on those 2029 earnings, up from -2.5x today. This future PE is lower than the current PE for the CA IT industry at 10.0x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.48%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Alithya is leaning heavily into higher value advisory and complex transformation work, but the conference call highlights longer sales cycles and large projects being split into smaller phases. This can create revenue timing gaps and near term softness in bookings that eventually weigh on revenue growth and earnings.
• The company is actively exiting lower margin government work in Canada, while revenue from Canadian operations fell by 7.4% to $55.2 million in the quarter and some government contracts and projects reached maturity. If higher margin offerings and new sector solutions do not scale fast enough, overall revenue and net margins could come under pressure.
• Alithya is relying on smart shoring and AI tools to improve delivery efficiency, and management still sees room to increase utilization and raise the offshore mix from roughly 13% of the workforce. Any difficulty ramping these centers, or client resistance to offshore delivery, could slow gross margin expansion and limit adjusted EBITDA progress.
• Growth in the U.S. has been supported by acquisitions such as eVerge and XRM Vision and higher billing rates, which also lifted SG&A expenses by 20.8% to $31.3 million and raised SG&A to 25.2% of revenue. If integration benefits, cross selling and utilization do not offset rising costs, operating leverage and net margins may suffer.
• The business is tightly linked to large partners like Oracle, Microsoft and AWS, including work on AI agents and cloud migration. The company recorded a $38 million non cash impairment and higher net debt of $122 million with a 2.3x net debt to trailing 12 month adjusted EBITDA ratio, so any slowdown in partner led demand, changes in partner priorities or increased funding costs could weigh on revenue visibility, cash flow and earnings.

Valuation

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

• The analysts have a consensus price target of CA$1.45 for Alithya Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$2.0, and the most bearish reporting a price target of just CA$1.15.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be CA$404.6 million, earnings will come to CA$46.3 million, and it would be trading on a PE ratio of 2.8x, assuming you use a discount rate of 11.5%.
• Given the current share price of CA$1.07, the analyst price target of CA$1.45 is 26.2% 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.