Transitioning To SaaS And Leveraging Industrial AI Will Unlock Future Opportunities In Automation And Infrastructure

Key Takeaways

• Leadership in industrial AI and strategic acquisitions will enhance productivity and innovation, potentially boosting revenue growth and future earnings.
  
• The shift to Software-as-a-Service and large infrastructure contracts are expected to improve recurring revenue, margins, and free cash flow.
  
• Siemens faces challenges from tariff uncertainties, economic sluggishness in key regions, AI adoption risks, and competitive pressures affecting revenue and margins.

Catalysts

A technology company, focuses in the areas of automation and digitalization in Europe, Commonwealth of Independent States, Africa, the Middle East, the Americas, Asia, and Australia.

• Siemens plans to leverage its leadership in industrial AI, predicting that increased AI adoption will enhance productivity and decision-making across industries such as automation, mobility, and infrastructure, potentially boosting future revenue growth.
  
• The continued transition to a Software-as-a-Service model in Siemens' digital industries, particularly with a targeted cloud ARR growth, is expected to drive higher recurring revenue and improved net margins.
  
• Strategic acquisitions like the Altair deal, aimed at expanding Siemens' industrial software business, are anticipated to accelerate innovation and contribute significantly to future earnings.
  
• Despite current headwinds, Siemens projects improvement in the automation order book by the second half of fiscal 2025, suggesting potential revenue recovery and an upswing in earnings.
  
• Large infrastructure contracts, such as those won in the U.K. high-speed rail system and data centers, are expected to contribute significantly to revenue and free cash flow in the medium term.

Siemens Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Siemens's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 11.4% in 3 years time.
• Analysts expect earnings to reach €10.6 billion (and earnings per share of €13.56) by about April 2028, up from €7.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €9.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.5x on those 2028 earnings, up from 18.6x today. This future PE is greater than the current PE for the GB Industrials industry at 20.0x.
• Analysts expect the number of shares outstanding to decline by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.55%, as per the Simply Wall St company report.

Siemens Future Earnings Per Share Growth

Risks

• Political decisions around tariff regimes and potential countermeasures could impact Siemens' revenue by creating uncertainty in their markets and affecting their global operations and supply chain.
  
• The sluggish economic activity and soft investment sentiment in core industries, such as automotive and machine building, especially in Europe and China, may put downward pressure on Siemens' revenue and margins.
  
• While Siemens is making advancements in industrial AI, there are macroeconomic risks and uncertainty around the faster adoption, which could impact their earnings if outcomes are less favorable than anticipated.
  
• Destocking issues in China and muted economic conditions in Europe present risks to Siemens' revenue recovery, especially in Digital Industries and automation, which have seen lower revenues.
  
• Competitive pressures and future uncertainty in the transition to Software-as-a-Service (SaaS) models in the software business could impact margins and revenue consistency, hinging on the success of ongoing operations and customer transitions.

Valuation

• The analysts have a consensus price target of €239.518 for Siemens 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 €285.0, and the most bearish reporting a price target of just €165.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €92.7 billion, earnings will come to €10.6 billion, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 5.6%.
• Given the current share price of €177.16, the analyst price target of €239.52 is 26.0% 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.