Regulatory Pressures And Fierce Cloud Competition Will Erode Value

Key Takeaways

• Increasing regulatory hurdles and heightened competition from major cloud providers threaten Coveo's ability to differentiate and achieve sustainable revenue growth.
  
• Reliance on a few key partners and uncertain IT spending create risks for recurring revenue stability and margin protection.
  
• Strong enterprise partnerships, AI-driven innovation, and an asset-light model position Coveo for scalable growth, higher margins, and lasting competitive advantage in the SaaS market.

Catalysts

Provides software-as-a-service artificial intelligence (AI) platform in Canada, the United States, and internationally.

• The ongoing surge in regulatory scrutiny around data privacy and AI-including tight legislation in Europe and forthcoming North American regulation-poses a mounting obstacle for Coveo Solutions, likely restricting their ability to access critical enterprise data that underpins their core AI-driven products, meaning future revenue growth is at significant risk.
  
• Hyperscale cloud providers such as Microsoft, AWS, and Google are accelerating their push into enterprise AI search and recommendation offerings, threatening to erode Coveo's market share and forcing sharper price competition; this would place severe pressure on both top-line growth and net margin sustainability over the next several years.
  
• The commoditization of AI-powered search and recommendation technology is intensifying, making differentiation increasingly difficult and driving down pricing power; as a result, gross margins and longer-term earnings potential are set to deteriorate as Coveo is forced to compete in a more crowded, price-sensitive marketplace.
  
• Macroeconomic uncertainty and potential prolonged slowdowns in IT and enterprise software spending threaten Coveo's capacity to win new customers and expand existing relationships, putting ambitious recurring revenue growth targets and earnings leverage in jeopardy as deal cycles elongate and budgets tighten.
  
• Persistent customer concentration risk, with significant expansion reliant on a handful of major partners such as SAP, creates vulnerability; any loss, churn, or repricing of these key accounts could result in outsized revenue and earnings volatility, undermining the stability of reported growth.

Coveo Solutions Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Coveo Solutions compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Coveo Solutions's revenue will grow by 14.9% annually over the next 3 years.
• The bearish 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 -16.6% to the average CA Software industry of 11.6% in 3 years.
• If Coveo Solutions's profit margin were to converge on the industry average, you could expect earnings to reach $24.2 million (and earnings per share of $0.27) by about August 2028, up from $-22.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 27.0x on those 2028 earnings, up from -27.8x today. This future PE is lower than the current PE for the CA Software industry at 51.6x.
• Analysts expect the number of shares outstanding to decline by 1.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.5%, as per the Simply Wall St company report.

Coveo Solutions Future Earnings Per Share Growth

Risks

• The rapid acceleration of digital transformation and AI adoption across enterprises is driving secular growth in demand for advanced search, personalization, and generative AI tools, directly expanding Coveo's addressable market and increasing the potential for long-term revenue growth.
  
• Coveo's deepening and high-level partnerships with large enterprise platforms such as SAP, Salesforce, and AWS are enhancing channel diversification, reducing customer acquisition costs, and creating privileged access to large customer bases, supporting both revenue growth and margin expansion over time.
  
• The company is experiencing robust core SaaS subscription revenue growth, with guidance pointing to a return to 20% growth rates by year end, and expanding net expansion rates-particularly for generative AI customers, where net expansion is above 150%-all suggesting strong retention and cross-sell, positively impacting future revenue and gross margins.
  
• Ongoing investments in AI R&D and product innovation have resulted in a highly differentiated, modular, and scalable platform (e.g., relevance-augmented retrieval, Agentic AI readiness), which supports higher pricing power, improved customer value, and durable competitive advantages, thereby supporting sustained gross and net margins.
  
• The shift to an asset-light partner implementation model with global system integrators (e.g., Deloitte, Accenture) aligns Coveo for rapid scale while maintaining recurring SaaS economics and stable operating cash flows, strengthening long-term financial predictability and profitability.

Valuation

• The assumed bearish price target for Coveo Solutions is CA$7.97, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Coveo Solutions's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$14.98, and the most bearish reporting a price target of just CA$7.97.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $207.4 million, earnings will come to $24.2 million, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 7.5%.
• Given the current share price of CA$9.08, the bearish analyst price target of CA$7.97 is 14.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.