AI Initiatives And Cost Management Will Strengthen Future Prospects

Key Takeaways

• Improved profitability through cost-base management and potential divestment could positively impact future earnings despite market challenges.
  
• Strategic investments in AI, cloud services, and security, along with a solid order backlog, signal potential revenue growth and stability.
  
• Weakening market environments and geopolitical instability threaten TietoEVRY's short-term revenue and growth in IT services and care solutions.

Catalysts

Operates as a software and services company.

• TietoEVRY is experiencing improved profitability despite a weakening market environment, focusing on cost-base management to enhance profitability margins, which may lead to increased net margins.
  
• Strategic review and potential divestment of TietoEVRY Tech Services could optimize business focus and financial performance, potentially impacting future earnings positively.
  
• Increased activity levels in AI and Gen AI, alongside the launch of a next-generation AI lab, could drive future innovation and revenue growth, particularly in data and cloud services.
  
• The company has a strong order backlog with significant contracts, like in banking, pointing to future revenue stability and growth over the coming years.
  
• Continued investments in high-growth areas like Cloud platforms, security, and expanding AI capabilities, suggest potential enhancements in revenue and net margins as market demand rebounds.

TietoEVRY Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TietoEVRY Oyj's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 6.7% in 3 years time.
• Analysts expect earnings to reach €197.4 million (and earnings per share of €1.66) by about February 2028, up from €160.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €230.7 million in earnings, and the most bearish expecting €173.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, up from 13.6x today. This future PE is lower than the current PE for the GB IT industry at 16.9x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.18%, as per the Simply Wall St company report.

TietoEVRY Oyj Future Earnings Per Share Growth

Risks

• Weakening market environment has led to a 1% revenue decline and predicted negative organic growth of -2%, which could continue to affect TietoEVRY's short-term revenue prospects.
  
• The slowing market for IT services, particularly in short-cycle consulting and software businesses, suggests potential revenue challenges going forward, impacting overall earnings.
  
• Budget deficits in Finland and Sweden's public sectors are affecting demand for TietoEVRY's care solutions, limiting potential growth in these markets and affecting target revenues.
  
• Decreasing internal revenues as businesses move to operate independently could impact growth trajectories and revenue streams until normalization occurs across businesses.
  
• Geopolitical instability due to exposure in regions like Ukraine could impact customer sentiment and disrupt service operations, which may affect future revenue and profitability.

Valuation

• The analysts have a consensus price target of €19.9 for TietoEVRY Oyj 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 €23.0, and the most bearish reporting a price target of just €16.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.9 billion, earnings will come to €197.4 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of €18.4, the analyst price target of €19.9 is 7.5% 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.