Digital Transformation And Generative AI Will Shape Enduring Success

Key Takeaways

• Accelerating digital transformation and AI integration increase demand for CGI's high-margin services, driving operational efficiency and growth across public and private sectors.
  
• Strong cybersecurity focus and successful acquisitions strengthen CGI's government and financial services portfolio, ensuring robust revenue visibility and operational synergies.
  
• Exposure to macroeconomic delays, client budget cycles, acquisition integration risks, rising compliance costs, and tech disruption threatens CGI's revenue stability, margins, and long-term growth.

Catalysts

Provides information technology (IT) and business process services.

• The ongoing acceleration in digital transformation initiatives-particularly in cloud migration, AI-driven automation, and data analytics-continues to boost client demand for CGI's managed services and proprietary IP across both public and private sectors, which is likely to drive sustained revenue growth and an increasing proportion of higher-margin recurring revenue.
  
• Rising global cybersecurity risks and heightened regulatory demands are translating to strong, durable demand for CGI's data protection and security-focused offerings, supporting a robust pipeline in government and financial services verticals and providing a multi-year tailwind for bookings and backlog.
  
• Expanding integration of generative AI and automation not only enhances CGI's own IP solutions (now with 40% of IP revenue AI-enabled), but also enables more outcome-based client engagements, leading to operational efficiencies, margin expansion, and improved earnings as AI adoption scales within both CGI and its clients.
  
• Successful execution of recent acquisitions (BJSS, Daugherty, Aeyon) is expected to unlock revenue synergies, leverage operational efficiencies, and, upon full integration, generate further EBIT margin expansion and EPS accretion.
  
• The company's robust $30.6 billion backlog, increasing book-to-bill ratios in higher growth segments (especially IP and managed services), and active pipeline of large digital modernization/legacy transformation projects position CGI for long-term revenue visibility and sustained free cash flow generation.

CGI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CGI's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.0% today to 12.8% in 3 years time.
• Analysts expect earnings to reach CA$2.3 billion (and earnings per share of CA$10.5) by about August 2028, up from CA$1.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, up from 17.1x today. This future PE is lower than the current PE for the US IT industry at 55.7x.
• Analysts expect the number of shares outstanding to decline by 2.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.06%, as per the Simply Wall St company report.

CGI Future Earnings Per Share Growth

Risks

• Continued macroeconomic uncertainty and delays in client decision-making, particularly for larger enterprise engagements and in manufacturing sectors exposed to tariffs, may result in prolonged softness in organic revenue growth, especially in key European markets, impacting top-line performance.
  
• Heavy reliance on government and large enterprise contracts exposes CGI to budgetary cycles, political risks, and competitive rebidding pressure, as reflected in ongoing challenges and lower volumes in U.S. federal business process outsourcing (BPO) and visa-driven contracts, threatening revenue stability and margin growth.
  
• Ongoing integration of recent acquisitions (e.g., BJSS, Daugherty) is suppressing margins in the short term and represents operational risk; slower-than-expected realization of synergies or integration-related disruptions may further pressure underlying EBIT margins and net earnings.
  
• Rising regulatory and compliance costs, especially with closing mergers in regions like France and the need to comply with evolving data sovereignty and cybersecurity requirements, may increase operating expenses and limit cross-border project opportunities, negatively affecting net margins and earnings growth.
  
• Heightened competitive pressures from global IT services leaders and rapid adoption of no-code/low-code automation or direct-client AI solutions could erode CGI's traditional IT consulting revenue streams and reduce billing opportunities, posing risks to sustained revenue growth and profitability over the long term.

Valuation

• The analysts have a consensus price target of CA$171.167 for CGI 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$185.0, and the most bearish reporting a price target of just CA$137.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$17.9 billion, earnings will come to CA$2.3 billion, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of CA$132.75, the analyst price target of CA$171.17 is 22.4% 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.