Generative AI And Commerce Will Unlock Future Markets

Key Takeaways

• Strategic partnerships and AI growth momentum enhance Coveo's market reach and revenue potential, optimizing conversions and profitability.
  
• Leadership changes and infrastructure improvements focus on operational efficiency, driving sustained revenue and potential earnings growth.
  
• Global market volatility, management changes, and competitive pressures may challenge Coveo's revenue growth, efficiency, and pricing in AI solutions.

Catalysts

Provides AI platforms that enable individualized, connected, and trusted digital experiences in Canada, the United States, and internationally.

• Record-high new bookings and growth momentum in generative AI, as well as strong growth in commerce, suggest increased revenue potential as the market for applied AI inflects, enhancing Coveo's chances to drive revenue growth.
  
• The confluence of search and generative AI technologies in Commerce and Customer Service highlights Coveo's capacity to optimize conversions, revenue, and margins, indicating an improvement in net margins and increased profitability.
  
• Coveo's strategic partnerships with SAP, Shopify, and AWS accelerate market adoption and expand the company's reach across high-growth industries, which can lead to an increase in revenues and customer acquisition.
  
• A robust pipeline and resumed buying behavior demonstrate strong future demand for Coveo's AI solutions, indicating potential for reacceleration in recurrent revenue streams and sustained revenue growth.
  
• Leadership transitions and infrastructure enhancements aim to scale operations effectively, focusing on market execution and business development, which is likely to contribute to improved operational efficiencies and potential EPS growth.

Coveo Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Coveo Solutions's revenue will grow by 13.0% annually over the next 3 years.
• Analysts are not forecasting that Coveo Solutions will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Coveo Solutions's profit margin will increase from -8.7% to the average CA Software industry of 15.0% in 3 years.
• If Coveo Solutions's profit margin were to converge on the industry average, you could expect earnings to reach $28.6 million (and earnings per share of $0.37) by about April 2028, up from $-11.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.8x on those 2028 earnings, up from -33.5x today. This future PE is lower than the current PE for the CA Software industry at 29.7x.
• Analysts expect the number of shares outstanding to decline by 6.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.23%, as per the Simply Wall St company report.

Coveo Solutions Future Earnings Per Share Growth

Risks

• The potential volatility in global markets and currency fluctuations could impact Coveo's financial performance, affecting revenues and cash flow.
  
• Recent management changes and the process of scaling operations might introduce transition uncertainties, impacting operational efficiency and earnings.
  
• Churn related to the Qubit platform and ongoing rightsizing within the customer base could suppress short-term SaaS revenue growth and net margins.
  
• The competitive landscape in AI, with major players and rapidly falling costs, might pressure Coveo's pricing and profitability in AI-driven solutions.
  
• Execution risks in expanding the go-to-market infrastructure on a global scale could affect Coveo's ability to capitalize on new bookings, thus impacting future revenue and growth trajectories.

Valuation

• The analysts have a consensus price target of CA$9.531 for Coveo Solutions 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$10.96, and the most bearish reporting a price target of just CA$6.71.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $190.0 million, earnings will come to $28.6 million, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 7.2%.
• Given the current share price of CA$5.57, the analyst price target of CA$9.53 is 41.6% 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.