Investing In STEM And AI Will Position For Future Success, But Near-Term Profits May Face Pressure

Key Takeaways

• Strategic focus on STEM and technology adoption aligns with megatrends, driving revenue growth as demand for tech roles surges.
  
• Investments in digital infrastructure and AI tools enhance productivity, profitability, and earnings, especially through employed contractor models with higher margins.
  
• Challenging market conditions and declining net fees threaten future revenue growth and profitability amid difficult macroeconomic factors like high inflation and interest rates.

Catalysts

Provides specialist recruitment services in the sciences, technology, engineering, and mathematics markets in the United Kingdom, Austria, Germany, Switzerland, Netherlands, Spain, Belgium, France, the United States, Dubai, Japan.

• SThree's strategic focus on STEM and flexible talent aligns with megatrends like digital access and technology adoption, creating a strong opportunity for revenue growth over the next five years as demand for tech-related roles is expected to increase by 50% (impacting revenue growth).
  
• The technology improvement program (TIP), with 80% of the business now on the new platform, is expected to drive productivity and efficiency gains, potentially leading to higher net margins as manual processes are automated and AI tools enhance sales team performance (impacting net margins).
  
• The increasing shift towards the employed contractor model, which generates 30-40% higher net fee margins than independent contractors, suggests potential improvements in profitability due to this service's higher margins (impacting net margins).
  
• SThree's proactive investments in digital infrastructure and AI-enhanced tools are anticipated to reduce operational costs and improve workforce productivity, which positions the company for enhanced earnings when market conditions improve (impacting earnings).
  
• Strategic enhancements in leadership, employee retention, and skill alignment through market-driven insights position SThree for long-term earnings growth, particularly as they capitalize on market recovery and emerging global STEM market needs (impacting earnings).

SThree Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SThree's revenue will decrease by -0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.3% today to 2.0% in 3 years time.
• Analysts expect earnings to reach £30.0 million (and earnings per share of £0.25) by about February 2028, down from £49.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £33.5 million in earnings, and the most bearish expecting £24 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.1x on those 2028 earnings, up from 6.8x today. This future PE is lower than the current PE for the GB Professional Services industry at 27.8x.
• Analysts expect the number of shares outstanding to decline by 3.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

SThree Future Earnings Per Share Growth

Risks

• Prolonged challenging market conditions across the industry have impacted new business activity, indicating risks to future revenue growth.
  
• Persistent softness in new business activity results in lower anticipated net fee performance, potentially affecting earnings.
  
• High inflation, interest rates, and the cost of living crisis contribute to difficult macroeconomic conditions, which may exert downward pressure on net margins.
  
• Declining net fees by 9% and operating profit by 9% on a constant currency basis highlight inefficiencies and potential future profit constraints.
  
• Although strategic investments continue, the company faces decreased profit before tax projections, reflecting ongoing financial strain impacting overall earnings.

Valuation

• The analysts have a consensus price target of £3.79 for SThree 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 £4.5, and the most bearish reporting a price target of just £2.75.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £1.5 billion, earnings will come to £30.0 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of £2.55, the analyst's price target of £3.79 is 32.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.