Cloud And AI Adoption Will Expand Japan And Middle East

Key Takeaways

• Ongoing AI, cloud, and high-value service investments, along with expansion into new markets, are expected to drive revenue growth and enhance client diversification.
  
• Operational efficiency gains and disciplined capital deployment position the company for improved profitability and stronger shareholder returns as currency headwinds normalize.
  
• Macroeconomic headwinds, margin pressures, currency volatility, geographic concentration, and talent cost risks threaten Nagarro's profitability and revenue growth despite ongoing growth initiatives.

Catalysts

Provides digital product engineering and technology solutions in Germany, the United States of America, and internationally.

• Client awareness and readiness to implement AI and cloud solutions are increasing, with more clients initiating substantial projects in these areas and Nagarro proactively redesigning its offerings, which positions the company to benefit from growing digital adoption trends-likely supporting future revenue acceleration.
  
• Structural and sustained improvements in operational efficiency and gross margin (as driven by the margin support program and improved utilization) are becoming more apparent, though recent foreign exchange headwinds have masked underlying earnings strength; these improvements should positively impact net margins once currency volatility normalizes.
  
• Expansion into large, high-potential markets such as Japan and continued momentum in the Middle East and German Mittelstand create additional growth levers on top of existing client diversification, improving both the predictability and upside potential of revenue.
  
• Partnerships and investments in high-growth areas like data engineering, AI, Edge AI, and IoT-in collaboration with global technology leaders-are expected to drive the mix of projects towards higher-value services, supporting both revenue growth and gross profit margin over the longer term.
  
• Balance sheet flexibility, strategic buyback readiness, and selective M&A capacity allow for capital deployment in shareholder-accretive ways once short-term FX-related constraints subside, providing optionality for future EPS improvement.

Nagarro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nagarro's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 8.1% in 3 years time.
• Analysts expect earnings to reach €93.1 million (and earnings per share of €5.98) by about August 2028, up from €40.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, down from 16.2x today. This future PE is lower than the current PE for the DE IT industry at 24.8x.
• Analysts expect the number of shares outstanding to decline by 5.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

Nagarro Future Earnings Per Share Growth

Risks

• The company's exposure to significant currency fluctuations has resulted in large noncash accounting losses (€18 million on adjusted EBITDA in H1 2025), and management expects continued volatility; ongoing FX headwinds could weaken earnings and net margins over the long term if not effectively hedged.
  
• Despite some growth initiatives, overall demand for IT services is described as "relatively slow," and full-year revenue guidance has been revised to the lower end, suggesting softening end-market conditions that could constrain revenue growth and lead to future earnings pressure.
  
• Overreliance on European markets, especially for key growth vectors like SAP projects in the German Mittelstand, raises risks if macroeconomic weakness, regulatory changes, or budget conservatism increase in these geographies, potentially dampening revenue growth.
  
• Intensifying competition in core service areas (data engineering, AI, managed services) and planned reinvestment of gross margin improvements into new offerings may result in margin compression, threatening both profitability and earnings growth if productivity gains cannot outpace increased costs.
  
• The company's business model remains heavily dependent on talent and "asset-light" operations; rising wage pressures, potential attrition challenges, and global talent competition could increase labor costs and erode net margins, especially as the company embarks on expansion in high-cost regions like Japan and Western Europe.

Valuation

• The analysts have a consensus price target of €88.25 for Nagarro based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.2 billion, earnings will come to €93.1 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of €51.5, the analyst price target of €88.25 is 41.6% 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.