Shrinking Subscription Deals And Commoditized AI Will Undermine Future Prospects

Key Takeaways

• Reliance on multiyear subscription deals and a lagging SaaS transition signal slowing organic growth and potential cash flow volatility.
  
• Mounting AI commoditization and stricter regulations threaten pricing power, margins, and global expansion efforts, especially beyond mature European markets.
  
• Transition to SaaS and international growth, AI-driven innovation, organic expansion in core segments, and strong financial flexibility underpin Nemetschek's long-term revenue and profitability outlook.

Catalysts

Provides software solutions for architecture, engineering, construction, operation, and media industries in Germany, the rest of Europe, the Americas, the Asia Pacific, and internationally.

• Nemetschek's recent outperformance relies heavily on exceptional growth in multiyear subscription deals within its Design segment, yet management admits these contracts are a temporary lever which will shrink moving forward, suggesting a structural slowdown in organic revenue growth as this accounting tailwind subsides and lower, more normalized Design segment growth becomes apparent.
  
• The global surge in AI and software tools, combined with Nemetschek's focus on AI features as higher tier or add-on options, risks rapid commoditization that will undermine pricing power and push the company into escalating R&D spending to stay competitive, thereby eroding operating margins and limiting sustainable earnings growth.
  
• Despite expansion efforts in high-potential regions like India, APAC, and Saudi Arabia, the company remains top-heavy in slower-growing, mature European markets, and management itself expresses little confidence in a significant German market rebound through next year, constraining international revenue diversification and overall growth prospects.
  
• The increasingly stringent regulatory environment on data handling and localization in digital construction markets exposes Nemetschek to higher compliance costs and operational complexity abroad, further threatening future margins and the scalability of its cloud-based global platform.
  
• The transition to a subscription/SaaS model-though still underway-lags best-in-class SaaS peers, with only about one third of legacy Design customers converted and revenue at roughly fifty percent subscription; this slow pace risks both customer attrition to newer rivals and a flattened recurring revenue trajectory, ultimately leading to more volatile cash flows and reduced valuation support.

Nemetschek Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nemetschek compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nemetschek's revenue will grow by 12.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 16.9% today to 20.5% in 3 years time.
• The bearish analysts expect earnings to reach €328.4 million (and earnings per share of €2.84) by about August 2028, up from €188.2 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 35.0x on those 2028 earnings, down from 84.5x today. This future PE is greater than the current PE for the GB Software industry at 30.4x.
• 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 6.35%, as per the Simply Wall St company report.

Nemetschek Future Earnings Per Share Growth

Risks

• The strategic and successful shift towards a subscription and SaaS-centric model, with recurring revenues now exceeding 90% of group revenues and strong momentum across all major brands, enhances revenue predictability and increases long-term earnings visibility.
  
• International expansion is accelerating, with particularly robust growth outside of Europe including 46% revenue growth in the Americas and 37% in Asia Pacific, reducing reliance on mature markets and unlocking high-growth regions such as India and Saudi Arabia, which could drive significant topline growth for years to come.
  
• Investment in AI and product innovation, including the launch of advanced AI agents and value-adding features integrated into higher-tier packages, positions Nemetschek for robust pricing power, differentiation, and potential uplifts in average revenue per user and margins over the medium to long term.
  
• The Build segment continues to deliver exceptional organic growth rates, notably through the Bluebeam and GoCanvas platforms, with no reliance on price hikes but pure volume expansion, underpinned by network effects and increasing adoption among enterprises and SMBs, directly supporting future revenue and EBITDA expansion.
  
• A strong balance sheet with a net debt-to-EBITDA ratio well below one, ongoing high cash conversion, and a proven record of value-accretive acquisitions provide ample financial flexibility for continued M&A, further supporting long-term revenue growth and profitability improvements.

Valuation

• The assumed bearish price target for Nemetschek is €83.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Nemetschek'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 €161.0, and the most bearish reporting a price target of just €83.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €1.6 billion, earnings will come to €328.4 million, and it would be trading on a PE ratio of 35.0x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of €137.7, the bearish analyst price target of €83.0 is 65.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.