Legacy Services Decline And Regulatory Pressures Will Erode Prospects

Key Takeaways

• The shift to cloud and AI, talent shortages, and increased regulation threaten profitability, growth prospects, and long-term competitiveness.
  
• Reliance on Nordic and European markets, along with integration and operational risks, leaves the company vulnerable to regional downturns and industry commoditization.
  
• Strategic focus on high-value software, AI, and digital services, along with improved operational efficiency and financial flexibility, positions the company for growth and enhanced profitability.

Catalysts

Operates as a software and services company.

• The accelerating transition of enterprises to cloud-native platforms and AI-driven solutions is poised to structurally decrease demand for TietoEVRY's legacy IT outsourcing and managed services, placing downward pressure on long-term revenue streams and challenging the company's growth narrative after the Tech Services divestment.
  
• Increasing cybersecurity risks and tightening data privacy regulations are set to amplify compliance costs and legal liabilities, particularly for a company with a strong European focus, thereby reducing net margins and potentially causing a loss of customer confidence in the face of mounting regulatory burdens.
  
• Persistent talent shortages and intensifying competition for highly skilled IT professionals across Europe are likely to accelerate wage inflation and heighten staff attrition, squeezing operating margins and hindering TietoEVRY's ability to execute on complex software and AI projects.
  
• With heavy dependence on the Nordic and select European markets, TietoEVRY remains acutely exposed to local economic cycles and regulatory changes, restricting opportunities for geographic diversification and placing future revenue and earnings growth at risk in the event of continued regional softness.
  
• Ongoing integration risks following major portfolio changes-including the Tech Services sale and upcoming CEO transition-threaten to disrupt operations, delay synergy realization, and undermine profitability, particularly as industry-wide commoditization and the rise of hyperscale cloud providers drive greater margin compression and erode competitive differentiation.

TietoEVRY Oyj Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on TietoEVRY Oyj compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming TietoEVRY Oyj's revenue will decrease by 13.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -2.6% today to 8.2% in 3 years time.
• The bearish analysts expect earnings to reach €148.6 million (and earnings per share of €1.24) by about July 2028, up from €-73.7 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 13.4x on those 2028 earnings, up from -26.5x 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 decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

TietoEVRY Oyj Future Earnings Per Share Growth

Risks

• The company's transition to an asset-light, specialized software and digital engineering business positions it to benefit from secular trends in digitalization, AI, and data-driven services, which could drive strong growth in revenue and improved net margins as these markets rebound.
  
• Significant growth in the order backlog, up 18% year-over-year driven by the Care business, and a 4% sequential increase, suggests a foundation for future revenue growth, especially as macroeconomic conditions normalize.
  
• Investments in AI and generative AI projects across multiple business segments, including new contracts in AI for Care and Create, indicate successful execution in high-value, high-growth areas, which could boost both revenue and long-term earnings.
  
• The divestment of Tech Services enables a sharper strategic focus and operational efficiency in higher-margin software divisions, which can lead to improved operating leverage and higher profitability in the next growth cycle.
  
• Strong cash flow and declining net debt, with management signaling readiness to adjust costs and invest for future expansion, provide financial resilience and flexibility to capitalize on industry upturns-supporting stable or increasing earnings and margins.

Valuation

• The assumed bearish price target for TietoEVRY Oyj is €13.1, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of TietoEVRY Oyj'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 €21.0, and the most bearish reporting a price target of just €13.1.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €1.8 billion, earnings will come to €148.6 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of €16.52, the bearish analyst price target of €13.1 is 26.1% 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.