European IT Consulting Will Face Margin Squeeze Amid Global Competition

Key Takeaways

• Wage inflation, talent shortages, and industry automation threaten long-term margin stability and earnings growth despite strong revenue momentum and sector opportunities.
  
• Efforts to expand internationally and shift toward software and SaaS revenues bring both new growth potential and heightened competitive, pricing, and execution risks.
  
• Heavy reliance on the German market, rising cost pressures, and execution risks in new regions threaten profitability and flexibility amid intensifying global competition and ongoing financial constraints.

Catalysts

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

• While adesso continues to deliver strong organic revenue growth, supported by robust digital transformation demand in Germany and across multiple European markets, persistent wage inflation and ongoing difficulty in attracting and scaling skilled IT personnel are likely to put sustained pressure on net margins over the coming years.
  
• Although the company's exposure to fast-growing sectors like health and utilities, as well as ongoing public sector digitalization, provides a healthy long-term pipeline for revenue expansion, the increasing automation and AI adoption across the wider industry could gradually commoditize core IT consulting services, limiting daily rate increases and introducing downward pressure on future earnings growth.
  
• While adesso's strategic expansion into international talent pools-such as the scaling up of operations in India-helps address local talent shortages and improves capacity utilization, this move also exposes the company to intensified competition from global consultancies and may dilute its traditional pricing advantage in its home markets, ultimately risking margin compression.
  
• The company is making ongoing investments in proprietary software and deepening vertical expertise, which positions it well for higher-margin licensing and SaaS revenues, but there is a risk that failure to accelerate this transition away from traditional project work could lead to stagnating returns if secular shifts in enterprise IT buying patterns reduce project-based demand.
  
• Despite a strong and diversified customer base and positive utilization trends, adesso remains vulnerable to rapid technology changes and the consolidation of the IT consulting industry, which favor larger global scale players and elevate the risk that the company must continually invest heavily in retraining and technical upgrades, impacting both cost structure and long-term net margin stability.

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 9.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.6% today to 2.6% in 3 years time.
• The bearish analysts expect earnings to reach €45.8 million (and earnings per share of €7.16) by about July 2028, up from €7.8 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 15.7x on those 2028 earnings, down from 71.9x today. This future PE is lower than the current PE for the GB IT industry at 27.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

adesso Future Earnings Per Share Growth

Risks

• Adesso's high concentration of revenues in Germany leaves it exposed to persistent macroeconomic weakness and industry-specific downturns in its largest market, which could weigh on revenue growth and profitability if the German economy underperforms.
  
• The company's margins are under pressure from rising wage costs and the need for external staffing due to skills mismatches, as material expenses and personnel expenses are increasing faster than EBITDA, potentially eroding net margins over time.
  
• Intensified competition from global IT consultancies, combined with the accelerating trend towards cloud-native, automated, and AI solutions, could commoditize core offerings and challenge adesso's ability to command premium prices, risking both revenue growth and earnings quality.
  
• Although the company is investing in new markets such as India and expanding elsewhere in Europe, successful integration and scaling of these operations present execution risks, which could result in higher costs and muted return on investment, ultimately affecting net earnings.
  
• Ongoing negative free cash flow in early quarters, coupled with higher net debt from recent acquisitions and share buybacks, may create financial constraints that reduce operational flexibility and impact future profitability and shareholder returns.

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 €45.8 million, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of €88.1, the bearish analyst price target of €95.0 is 7.3% 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.