European Regulation And Cloud Shift Will Drain Revenues Down

Key Takeaways

• Increasing automation, AI adoption, and cloud migration threaten TietoEVRY's traditional service revenues and competitive position in core markets.
  
• Rising compliance costs, underinvestment in innovation, and regional market dependence may erode margins, market share, and long-term earnings stability.
  
• Cost optimization, strong order backlog, strategic divestments, and renewed client confidence position Tietoevry for future growth and margin improvement through targeted reinvestment.

Catalysts

Operates as a software and services company.

• Ongoing automation and widespread adoption of artificial intelligence are likely to structurally diminish the demand for traditional IT consulting and support services-placing sustained downward pressure on TietoEVRY's core revenue streams and threatening the organic growth of key segments such as Create and Industry long-term.
  
• Heightened regulatory complexity, including stricter data privacy and digital sovereignty requirements in Europe, is expected to intensify compliance obligations and increase operating costs for TietoEVRY, which may significantly compress net margins over the next several years as resource allocation shifts toward non-revenue-generating compliance activities.
  
• The accelerating shift of enterprise customers to cloud-native platforms and public cloud ecosystems led by global hyperscalers is poised to erode TietoEVRY's ability to capture high-value project revenue and retain relevance in the value chain, thereby undermining long-term revenue growth potential and the competitive positioning of proprietary offerings.
  
• Persistent underinvestment in research and development relative to larger global competitors, combined with a legacy of insufficient innovation, exposes TietoEVRY to the risk of losing market share in growth areas such as advanced automation, next-generation cloud services, and AI-limiting future earnings growth and jeopardizing its ability to maintain premium pricing.
  
• High dependency on Nordic markets and a concentrated customer base leaves TietoEVRY acutely vulnerable to regional economic downturns, competitive pricing pressure from lower-cost international providers, and client attrition, which collectively reduce earnings stability and threaten sustainable profit generation into the future.

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 10.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -6.4% today to 9.1% in 3 years time.
• The bearish analysts expect earnings to reach €166.3 million (and earnings per share of €1.4) by about July 2028, up from €-163.2 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 11.3x on those 2028 earnings, up from -10.7x today. This future PE is lower than the current PE for the GB IT industry at 16.6x.
• Analysts expect the number of shares outstanding to decline by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.24%, as per the Simply Wall St company report.

TietoEVRY Oyj Future Earnings Per Share Growth

Risks

• The company is executing a large cost optimization program targeting 150 million euro in annual cost savings by end of 2026, focusing on SG&A reduction rather than core sales or delivery functions; if successful, this should materially improve operating margins and bottom-line earnings.
  
• Tietoevry's record-high order backlog, especially in the Banking segment, is up 14 percent year-over-year, providing strong visibility and a firm foundation for future revenue growth despite recent performance weakness.
  
• Renewed client confidence and multiple new contract wins in core markets, such as with Norwegian savings banks and international healthcare collaborations, suggest an improved competitive position that could drive higher sales and recurring revenues.
  
• The company's strategy shift toward customer orientation, sales focus, and selective investments in growth areas like AI, banking, and healthcare software leverages secular industry trends such as digital transformation and automation, potentially reversing past stagnation in revenue and delivering top-line acceleration.
  
• Divestment of Tech Services reduces balance sheet debt and capital intensity, increases cash flow by cutting approximately half of CapEx, and allows Tietoevry to reinvest freed-up resources in higher-return growth initiatives, supporting both EBITDA improvement and shareholder returns.

Valuation

• The assumed bearish price target for TietoEVRY Oyj is €12.3, 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 €20.0, and the most bearish reporting a price target of just €12.3.
  
• 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 €166.3 million, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of €14.79, the bearish analyst price target of €12.3 is 20.2% 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.