AI And Automation Rollout Will Drive Higher Margins And Long-Term Earnings Potential

Catalysts

About q.beyond

q.beyond is a German IT services provider focused on Managed Services, consulting and secure cloud and AI solutions for the Mittelstand.

What are the underlying business or industry changes driving this perspective?

• Rollout of AI and automation across the Managed Services portfolio, including NIS and DORA compliant services, is expected to structurally lift utilization and push EBITDA margin toward and beyond the 10 percent midterm target, supporting stronger earnings growth.
• Rising demand from Mittelstand customers for data sovereignty and reduced dependency on large U.S. cloud providers positions q.beyond’s Enterprise AI and private cloud offerings as preferred solutions, which can expand high margin recurring revenues.
• Strategic elevation within the Microsoft Jumpstart Partner Program and focus on SAP, security and cloud consulting provide access to larger, higher value projects, supporting sustained Consulting segment revenue expansion and further gross margin improvement.
• Underutilized own data centers, combined with a growing funnel including AI services delivered from these facilities, offer operating leverage once deals convert, turning incremental square meters into a profit booster and enhancing free cash flow.
• Disciplined M&A focused on sector expertise in areas such as energy and health care, backed by a strong balance sheet and net liquidity near EUR 40 million, can accelerate top line growth while being accretive to EBITDA margin and future net income.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming q.beyond's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.0% today to 3.9% in 3 years time.
• Analysts expect earnings to reach €8.3 million (and earnings per share of €0.06) by about December 2028, up from €-1.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €13.0 million in earnings, and the most bearish expecting €5.7 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 22.5x on those 2028 earnings, up from -50.1x today. This future PE is lower than the current PE for the GB IT industry at 25.3x.
• 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 7.06%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current focus on profitability over growth already results in a revenue loss of EUR 3 million to EUR 4 million every quarter, and if macro conditions in Germany remain weak or worsen, demand for new projects could stay subdued. This could limit the ability to reaccelerate top line growth and weigh on long term revenue expansion and earnings.
• Utilization of own data centers is described as not satisfying and key larger deals have been slower and more complicated to close than expected. If the mid to long term AI and private cloud pipeline does not convert as planned, fixed cost absorption will remain low and the expected operating leverage on margins and free cash flow may not materialize.
• The strategy assumes a gradual improvement in the German economy and a strong ramp up in AI and security projects, but AI adoption cycles in the Mittelstand are still in an evaluating phase and could be longer or more price sensitive than anticipated. This would delay high margin Managed Services and Consulting growth and could pressure EBITDA margin expansion.
• The plan to push the offshore quota to 20% to 30% and grow nearshore capacity, while maintaining high customer satisfaction and sector expertise, carries execution risk. Any misalignment of skills, utilization or wage inflation in Eastern and Southern Europe could erode cost advantages and negatively affect net margins and earnings.
• The growth strategy relies partly on disciplined M&A in energy and health care verticals and on potential share buybacks or dividends funded by roughly EUR 40 million net liquidity. Overpaying for acquisitions, integration challenges or a misallocation between M&A and shareholder returns could dilute returns on capital and slow future earnings growth and free cash flow generation.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €1.23 for q.beyond 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 €1.3, and the most bearish reporting a price target of just €1.1.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €211.2 million, earnings will come to €8.3 million, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of €0.73, the analyst price target of €1.23 is 40.7% 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.