SaaS Transition And AI Hub Will Expand Global Presence

Key Takeaways

• The shift to a subscription and SaaS model has established stable revenue growth, supported by increased annual recurring revenue and strategic acquisitions.
  
• Expansion into high-growth regions and investment in AI and cloud technologies aim to diversify revenue and strengthen competitive positioning.
  
• Transitioning to a SaaS model, integrating acquisitions, and investing in AI may pressure profitability and net margins, given economic uncertainties and potential construction sector downturns.

Catalysts

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

• The transition to a subscription and SaaS-centric business model has shown significant progress, with recurring revenue reaching 87% of total revenue, driven by a 41.9% increase in annual recurring revenue, which positions Nemetschek for stable and predictable revenue growth.
  
• The acquisition of GoCanvas is expected to continue contributing to revenue growth and integration synergies with Bluebeam, potentially enhancing operational efficiency and expanding market reach, impacting earnings positively.
  
• The establishment of an AI and data innovation hub aims to accelerate AI integration across Nemetschek’s products, which could drive future revenue streams through enhanced product offerings and increased customer adoption.
  
• The company’s international expansion strategy, particularly in high-growth regions like North America and Asia-Pacific, including new operations in India, is targeted to diversify revenue sources and reduce dependency on the European market, thereby boosting future revenue growth.
  
• Investments in M&A and minority stakes in innovative companies positioned in cloud solutions or AI could provide new revenue and technology opportunities, ultimately enhancing long-term earnings growth and reinforcing Nemetschek’s competitive position.

Nemetschek Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nemetschek's revenue will grow by 15.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.6% today to 21.1% in 3 years time.
• Analysts expect earnings to reach €325.0 million (and earnings per share of €2.82) by about April 2028, up from €175.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 47.4x on those 2028 earnings, down from 71.4x today. This future PE is greater than the current PE for the GB Software industry at 26.5x.
• 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 6.03%, as per the Simply Wall St company report.

Nemetschek Future Earnings Per Share Growth

Risks

• The transition to a subscription and SaaS-centric business model could present short-term accounting impacts and lead to temporary revenue recognition issues, affecting revenue and earnings visibility.
  
• The increased amortization charges and interest expenses related to the acquisition of GoCanvas might suppress net margins, resulting in an underproportional EPS increase compared to revenue growth.
  
• Nemetschek's significant investment in AI and international expansion may not yield immediate financial returns and could lead to increased operational expenses, pressuring profitability.
  
• Economic uncertainties and potential downturns in global markets, particularly in the construction sector, could adversely impact revenue growth and net margins due to reduced demand for architectural software.
  
• The dependency on the successful integration and performance of acquisitions like GoCanvas adds risk to earnings and net margins if the integration does not progress as planned or if the acquisitions underperform.

Valuation

• The analysts have a consensus price target of €112.3 for Nemetschek 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 €142.0, and the most bearish reporting a price target of just €68.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.5 billion, earnings will come to €325.0 million, and it would be trading on a PE ratio of 47.4x, assuming you use a discount rate of 6.0%.
• Given the current share price of €108.6, the analyst price target of €112.3 is 3.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.