DACH Exposure Will Limit Margins Despite Digital Progress

Key Takeaways

• Accelerating automation and AI may reduce demand for traditional consulting, challenging revenue growth and service utilization over time.
  
• Wage inflation, talent shortages, and intensified global competition threaten sustainable margin expansion and limit long-term market opportunities for bespoke solutions.
  
• Heavy dependence on the DACH region, challenges in international expansion, rising costs, and negative cash flow threaten long-term profitability and financial flexibility.

Catalysts

Provides IT services in Germany, Austria, Switzerland, and internationally.

• While adesso has demonstrated robust revenue growth despite a recessionary environment and benefits from accelerating digital transformation across industries, demand for traditional IT consulting and software development could diminish over the long term as automation and artificial intelligence become more pervasive, threatening both top-line growth and billable utilization rates.
  
• Although there is an expectation of a strengthening pipeline from public sector digitalization budgets and increased IT modernization needs among legacy industries, lingering delays in government spending, slow budget releases, and potential fiscal tightening present ongoing risks to the consistency of project inflows and future revenues.
  
• While diversification of customers and industries reduces dependence on any single client or sector, sustaining premium pricing and margin expansion may become increasingly difficult if wage inflation and talent shortages persist in key European markets, pushing personnel costs higher and compressing net margins.
  
• Despite actively investing in international expansion and shoring capacities-especially in overseas locations like India-challenges in efficiently scaling operations abroad and integrating offshore teams may lead to an uneven earnings contribution and a slower path to improved net margins than anticipated.
  
• Even as proprietary software product sales in insurance, healthcare, and banking offer higher-margin, recurring revenue streams, the company faces greater competition from global consultancies and specialized SaaS vendors; rapid shifts towards off-the-shelf solutions and increased in-sourcing by clients could limit the overall addressable market for adesso's bespoke solutions, constraining long-term revenue and net margin growth.

adesso Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on adesso compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming adesso's revenue will grow by 8.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.9% today to 2.6% in 3 years time.
• The bearish analysts expect earnings to reach €46.4 million (and earnings per share of €7.26) by about August 2028, up from €12.3 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 12.8x on those 2028 earnings, down from 43.1x today. This future PE is lower than the current PE for the GB IT industry at 24.8x.
• Analysts expect the number of shares outstanding to decline by 2.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

adesso Future Earnings Per Share Growth

Risks

• adesso remains heavily dependent on the DACH region for revenues, with Germany, Austria, and Switzerland contributing 96% of group revenue, leaving the company highly exposed to local economic stagnation or recession and thus risking both revenue growth and earnings resilience.
  
• The company's international expansion is still nascent, with foreign activities (excluding Switzerland) at a much smaller base and experiencing volatile growth, suggesting there could be persistent difficulties in scaling abroad which may compress margins and hold back long-term earnings growth.
  
• An increasing reliance on external partners and consortium models for project delivery could erode profitability through higher material costs, and if these larger, more complex projects underperform or fail to deliver expected synergies, this may pressure net margins over time.
  
• Despite recent improvements, profitability levels such as EBITDA margin (currently 5.2%) remain well below historical highs, and sustained upward movement appears vulnerable to ongoing wage inflation and talent shortages in core markets, potentially constraining net margin expansion.
  
• Operating cash flow and free cash flow are both negative in the first half of the year, driven by working capital outflows and increased investments, implying that execution missteps or continued negative cash conversion could result in higher net debt, putting long-term pressure on balance sheet flexibility and ultimately impacting earnings and reinvestment capacity.

Valuation

• The assumed bearish price target for adesso is €95.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of adesso'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 €160.0, and the most bearish reporting a price target of just €95.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €1.8 billion, earnings will come to €46.4 million, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of €83.0, the bearish analyst price target of €95.0 is 12.6% 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.