Cloud And AI Demand Will Drive Long Term Stability In This IT Leader

Catalysts

About NTT DATA Group

NTT DATA Group is a global IT services and consulting company that supports clients with digital transformation, cloud, data center, and AI-driven solutions.

What are the underlying business or industry changes driving this perspective?

• Expansion of multi year cloud migration and security projects in North America, driven by coordinated global practice offerings and centralized growth leadership, is expected to support sustained net sales growth and higher gross profit over the next several years.
• Robust demand from central and local governments and telecom and utilities for public and social infrastructure systems, combined with clearer risk visibility on past unprofitable projects, is likely to stabilize margins and gradually lift segment operating profit.
• Growing global demand for data center capacity from hyperscalers and AI workloads, supported by a larger balance sheet and flexible funding via REIT and third party capital, positions the company to scale infrastructure assets and increase recurring infrastructure revenue.
• Rising enterprise appetite for domain specific AI, such as private AI models optimized for Japanese language, finance and healthcare, together with managed AI services, is expected to open higher value solutions that can enhance both revenue per client and net margins.
• Global rollout of AI agent and tailored AI solution offerings, including new investments in Silicon Valley, is expected to move projects from proof of concept to commercialization at scale, which could drive incremental service revenue and operating earnings growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming NTT DATA Group's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 4.3% in 3 years time.
• Analysts expect earnings to reach ¥242.4 billion (and earnings per share of ¥164.87) by about December 2028, up from ¥142.3 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ¥301.7 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 27.3x on those 2028 earnings, down from 39.1x today. This future PE is greater than the current PE for the JP IT industry at 17.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent execution issues in domestic public and social infrastructure, such as repeat unprofitable projects or weak pricing discipline, could erode profitability even in a strong demand environment, weighing on net margins and operating earnings over time.
• Large multiyear cloud migration and security contracts in North America may not ramp as expected or could face cost overruns, delaying the anticipated turnaround and limiting the contribution to net sales growth and gross profit improvement.
• Capital allocation trade offs between data center expansion, M&A and other AI related investments could lead to underinvestment in the most attractive secular growth areas, reducing the company’s ability to capture rising AI and hyperscaler demand and constraining long term revenue and earnings growth.
• If the company is slow to convert private AI and AI agent initiatives into scalable, repeatable offerings, global peers might capture enterprise AI budgets first, limiting NTT DATA Group’s ability to lift revenue per customer and structurally expand net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ¥3750.0 for NTT DATA Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ¥5590.3 billion, earnings will come to ¥242.4 billion, and it would be trading on a PE ratio of 27.3x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of ¥3965.0, the analyst price target of ¥3750.0 is 5.7% lower. 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.