Partnerships With Volkswagen, Lockheed Martin, And Bayer Will Expand Market Presence

Key Takeaways

• Expansion of the 3DEXPERIENCE platform and integration of AI services are set to drive strong future software revenue growth and enhance solution appeal.
  
• Strategic partnerships and cloud adoption are expected to boost recurring revenue and financial stability through predictable and stable cash flows.
  
• Slowing demand and sector challenges may pressure Dassault Systèmes’ growth, with heightened execution risk and potential macroeconomic impacts on financial performance.

Catalysts

Provides software solutions and services worldwide.

• Expansion and adoption of the 3DEXPERIENCE platform across industries and regions, particularly in sectors like aerospace and automotive, is expected to drive strong software revenue growth in the future.
  
• The integration of generative AI and new AI-based services into Dassault's offerings, such as 3D UNIV+RSES, could enhance the appeal and value of their solutions, potentially increasing earnings through service expansion and intellectual property management.
  
• Strategic partnerships with major clients such as Volkswagen, Lockheed Martin, and Bayer highlight competitive displacements and expansion of existing relationships, which could result in higher recurring revenue and long-term financial stability.
  
• Growth opportunities in life sciences with the strategic repositioning of MEDIDATA and expansion into manufacturing and PLM are anticipated to return the sector to double-digit growth, impacting revenue positively.
  
• The increasing shift towards cloud-based solutions and a higher percentage of recurring revenue, expected to reach 81% of software revenue by 2025, should lead to more predictable and stable cash flows, thereby improving net margins.

Dassault Systèmes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dassault Systèmes's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.3% today to 22.7% in 3 years time.
• Analysts expect earnings to reach €1.8 billion (and earnings per share of €1.35) by about March 2028, up from €1.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €2.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.3x on those 2028 earnings, down from 42.7x today. This future PE is greater than the current PE for the GB Software industry at 25.6x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.17%, as per the Simply Wall St company report.

Dassault Systèmes Future Earnings Per Share Growth

Risks

• The automotive sector faces slowing demand due to lower EV adoption rates, creating potential pressure on Dassault Systèmes' revenue growth, particularly as the automakers rely on 3DEXPERIENCE for transformation.
  
• Supply chain disruptions and production ramp-up challenges in the aerospace industry could hinder Dassault Systèmes' revenue and the effectiveness of 3DEXPERIENCE's implementation in the aerospace sector.
  
• The competitive displacement aspect in multiple sectors implies high execution risk in retaining and expanding market share, which could impact future revenue if competitive bids are lost.
  
• MEDIDATA's growth is dependent on factors like volume pressures at CROs, which could impede revenue from Life Sciences if growth in Phase I studies and those by CRO partners doesn't materialize as expected.
  
• A potential macroeconomic shift, such as changes in U.S. tax laws or industry-specific challenges in key markets like China, could negatively affect Dassault Systèmes' earnings and profit margins, impacting overall financial performance.

Valuation

• The analysts have a consensus price target of €40.917 for Dassault Systèmes 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 €49.0, and the most bearish reporting a price target of just €30.0.
• 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 36.3x, assuming you use a discount rate of 7.2%.
• Given the current share price of €39.05, the analyst price target of €40.92 is 4.6% 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.