AI And Cloud Transformation Will Optimize Future Airline Operations

Key Takeaways

• Amadeus's progress in airline distribution and AI integration supports future revenue growth and improved new margins.
  
• The cloud transformation and share repurchase program are poised to enhance flexibility and significantly boost EPS.
  
• Slow NDC adoption, cloud transformation costs, and external events may impact revenue growth, while delays in payments and hospitality segments pose additional challenges.

Catalysts

Operates as a transaction processor for the travel and tourism industry in Spain, Germany, rest of Europe, the Middle East, Africa, Asia and the Pacific, the United States of America, and rest of America.

• Amadeus is advancing in aggregating NDC content, becoming a leading enabler of airline distribution, which is expected to drive future Air Distribution revenue growth.
  
• The cloud transformation, expected to complete by early 2026, aims to enhance flexibility, scalability, and innovation, potentially improving net margins due to reduced costs.
  
• Expansion in the Air IT Solutions segment, including the adoption of Nevio by major airlines like Air France-KLM, is set to enhance revenue growth and offer margin expansion opportunities.
  
• Advancing AI and machine learning integration to personalize customer journeys and optimize operations is poised to support long-term revenue growth and improve net margins.
  
• The initiation of a €1.3 billion share repurchase program is expected to boost earnings per share (EPS) significantly.

Amadeus IT Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Amadeus IT Group's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.4% today to 22.2% in 3 years time.
• Analysts expect earnings to reach €1.8 billion (and earnings per share of €4.0) by about March 2028, up from €1.3 billion 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 25.8x on those 2028 earnings, up from 24.2x today. This future PE is greater than the current PE for the GB Hospitality industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.6%, as per the Simply Wall St company report.

Amadeus IT Group Future Earnings Per Share Growth

Risks

• The transition to NDC (New Distribution Capability) may progress slowly, affecting the pace of booking growth and consequently impacting revenue growth from the Air Distribution segment.
  
• The completion of the cloud transformation may initially lead to higher fixed costs, potentially pressuring net margins before cloud-related cost efficiencies are fully realized.
  
• The impact of unpredictable external events, such as geopolitical tensions or environmental factors, could adversely affect air travel demand and thus influence booking volumes and revenue.
  
• The potential delay in payments business expansion, particularly in Asia Pacific and the Americas, may affect the expected contribution to overall revenue growth.
  
• The hospitality segment's growth might be constrained by the pace of major customer implementations, such as Marriott and Accor, potentially affecting revenue targets and cash flow.

Valuation

• The analysts have a consensus price target of €79.013 for Amadeus IT Group 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 €91.0, and the most bearish reporting a price target of just €65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €8.0 billion, earnings will come to €1.8 billion, and it would be trading on a PE ratio of 25.8x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of €69.36, the analyst price target of €79.01 is 12.2% 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.