Cloud And AI Adoption Will Modernize Global Operations

Key Takeaways

• Fujitsu's focus on cloud applications and business model innovation is driving revenue growth, while AI adoption and delivery service transformation improve profitability.
  
• Strategic investments in AI and quantum computing are poised to differentiate Fujitsu's technology offerings, enhancing competitiveness and long-term growth.
  
• High investments in growth and transformation may strain cash flow, while declining international revenue and currency challenges pose risks to overall earnings.

Catalysts

Operates as an information and communication technology company in Japan and internationally.

• Fujitsu's shift towards cloud-based business applications and cross-industry business models, driven by Fujitsu Uvance, is expected to continue driving revenue growth. The Uvance business increased revenue by 31% year-on-year, with further expansion projected to ¥700 billion, potentially impacting overall revenue favorably.
  
• The focus on transforming delivery services through Global Delivery Centers and the adoption of AI for efficiency is projected to improve profitability. This is evidenced by a 2% gross profit margin improvement in fiscal 2024, with further annual improvements expected, which could bolster net margins.
  
• Fujitsu's modernization business is rapidly expanding, with revenue increasing 86% year-on-year in fiscal 2024. Continued integration of digital transformation and horizontal solutions is anticipated to sustain this momentum, potentially boosting future revenue growth significantly.
  
• Structural and business portfolio reforms in international markets, particularly in Europe and Asia Pacific, aim to enhance profitability. The operating margin improved from 1.7% to 4.1% in international regions, indicating ongoing efforts may lift future earnings.
  
• Strategic investments in AI, quantum computing, and next-generation processors are expected to differentiate Fujitsu's offerings and drive technological advancement. These initiatives, including partnerships and developments, have the potential to enhance Fujitsu's competitive edge, contributing to long-term earnings growth.

Fujitsu Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fujitsu's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 8.1% in 3 years time.
• Analysts expect earnings to reach ¥323.6 billion (and earnings per share of ¥188.74) by about May 2028, up from ¥197.3 billion 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 20.4x on those 2028 earnings, down from 28.4x today. This future PE is greater than the current PE for the JP IT industry at 17.3x.
• Analysts expect the number of shares outstanding to decline by 3.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.71%, as per the Simply Wall St company report.

Fujitsu Future Earnings Per Share Growth

Risks

• Declining revenue in international regions, particularly in Europe, signifies challenges in global market expansion, which could impact overall revenue growth.
  
• The decrease in demand for network products and the delayed recovery anticipated to begin only from fiscal 2026 pose risks to revenue and profitability in Hardware Solutions.
  
• Anticipated negative impacts from foreign exchange movements could affect revenue in Regions International, impacting overall earnings.
  
• High levels of investment in growth areas and transformation initiatives could strain cash flow if the expected returns are not realized, affecting overall earnings.
  
• The scaling down of low-profit businesses in Ubiquitous Solutions could lead to reduced revenue levels, even if profitability improves.

Valuation

• The analysts have a consensus price target of ¥3390.0 for Fujitsu 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 ¥3800.0, and the most bearish reporting a price target of just ¥2000.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥3975.0 billion, earnings will come to ¥323.6 billion, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of ¥3151.0, the analyst price target of ¥3390.0 is 7.1% 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.