Investments In AI And Cloud Expansion Will Drive Future Growth

Key Takeaways

• Strategic investment in AI and cloud technologies positions Bytes Technology Group for significant revenue growth as demand increases.
  
• Expansion in cybersecurity offerings aims to capture market share, benefiting from higher-margin services to enhance net margins.
  
• Economic uncertainty and reliance on low-margin public contracts pressure net margins, while strategic alignment on Microsoft priorities and upselling are critical for future growth.

Catalysts

Offers software, IT security, hardware, and cloud services in the United Kingdom, rest of Europe, and internationally.

• Bytes Technology Group's investment in new enterprise-grade systems and office environments is set to support future growth. This can lead to increased operational efficiency and the ability to scale, potentially boosting earnings.
  
• The expansion of their cloud base in public and corporate sectors and strategic focus on AI-powered software products suggests potential for significant revenue growth as demand for these technologies increases.
  
• Continued investment in cybersecurity offerings and expertise positions the company to capture a larger portion of the cybersecurity market, which can enhance net margins due to the higher-margin profile of cybersecurity services.
  
• Hiring more technical and sales staff aligns with the company's growth strategy and can drive future revenue growth by increasing sales capacity and improving the quality of customer service and technical support.
  
• Development of a customer-facing marketplace portal and internal order processing platform is expected to launch by the second half of FY '26, which could simplify transactions, improve user experience, and boost revenue by facilitating access to a broader range of products.

Bytes Technology Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bytes Technology Group's revenue will grow by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.5% today to 24.0% in 3 years time.
• Analysts expect earnings to reach £64.5 million (and earnings per share of £0.25) by about February 2028, up from £51.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.8x on those 2028 earnings, up from 21.4x today. This future PE is lower than the current PE for the GB Software industry at 32.9x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

Bytes Technology Group Future Earnings Per Share Growth

Risks

• The recent snap general election in the U.K. has brought about economic and political uncertainty, which may result in more cautious decision-making and delayed investment by corporate customers, potentially impacting future revenue growth.
  
• A shift in product sales focus towards public sector contracts, which are often won at lower margins, has been observed. This could pressure net margins if not offset by sufficient volume or higher-margin services.
  
• The reliance on growth from technical headcount and regional office expansions presents execution risk. If these investments do not translate into increased revenues and earnings, they may affect profitability and net margins.
  
• The changes in Microsoft's vendor rebate programs require adaptation and alignment with strategic priorities such as Azure, security, and AI. Misalignment or failure to capitalize on these priorities could impact Bytes' future gross profit from Microsoft rebates.
  
• A significant portion of Bytes' gross profit relies on renewals and upselling to existing public sector contracts. Any slowdown in these extensions or upselling opportunities could affect revenue momentum and overall financial performance.

Valuation

• The analysts have a consensus price target of £6.003 for Bytes Technology Group 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 £6.6, and the most bearish reporting a price target of just £5.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £268.5 million, earnings will come to £64.5 million, and it would be trading on a PE ratio of 27.8x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of £4.6, the analyst price target of £6.0 is 23.4% higher.
  
• 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.