Cloud Transition And GenAI Will Expand Market Share

Key Takeaways

• Transition to cloud solutions and strategic acquisitions enhance recurring revenue, market share, and support sustainable growth and margin improvement potential.
  
• Investments in GenAI-enabled features and operational efficiencies promote customer retention, engagement, and net earnings growth through enhanced value and scalability.
  
• Declines in nonrecurring revenue and increased finance costs and tax rates pose challenges to Wolters Kluwer's revenue stability and net profit margins.

Catalysts

Provides professional information, software solutions, and services in the Netherlands, rest of Europe, the United States, Canada, the Asia Pacific, the United Arab Emirates, and internationally.

• The transition towards cloud-based solutions is progressing, with cloud software revenues exceeding on-premise revenues for the first time. This shift is expected to drive revenue growth as cloud solutions generally have recurring revenue models, enhancing overall revenue predictability and potential for higher margins.
  
• Ongoing investments in product development, including the introduction of GenAI-enabled features, are anticipated to enhance customer engagement, retention, and perceived value, potentially driving both revenue and margin improvements.
  
• Strategic acquisitions, such as the purchase of Registered Agent Solutions (RASi), are intended to expand market share in the small to medium-sized enterprise sector, thereby increasing revenue opportunities and supporting sustainable future growth.
  
• Wolters Kluwer is prioritizing scaling its expert solutions and cloud-based products over the next three years, with a focus on high-growth adjacencies and market penetration, which should boost revenue and possibly improve net margins through the realization of economies of scale.
  
• Operational efficiencies achieved through the centralization of core functions and further process automation using advanced technologies (e.g., GenAI for software development and customer service) are likely to support margin expansion, impacting net earnings positively.

Wolters Kluwer Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wolters Kluwer's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.2% today to 18.7% in 3 years time.
• Analysts expect earnings to reach €1.3 billion (and earnings per share of €6.05) by about March 2028, up from €1.1 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 32.9x on those 2028 earnings, up from 32.1x today. This future PE is greater than the current PE for the GB Professional Services industry at 17.7x.
• Analysts expect the number of shares outstanding to decline by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.37%, as per the Simply Wall St company report.

Wolters Kluwer Future Earnings Per Share Growth

Risks

• The company is experiencing a decline in on-premise software licenses at CCH Tagetik, which could lead to a shift in client demand and potential revenue reductions in the short term. (Impacts revenue)
  
• Nonrecurring revenue streams are volatile, with some categories, like on-premise software licenses and implementation services, seeing a decline, which can impact overall revenue stability. (Impacts revenue)
  
• Adjusted net finance costs increased due to lower interest income and higher coupon interest on refinanced debt, along with net foreign exchange losses, which could affect future net profits. (Impacts earnings)
  
• There is uncertainty in the regulatory landscape, particularly concerning the Corporate Transparency Act in the U.S., which could lead to unpredictable impacts on revenue for Financial & Corporate Compliance. (Impacts revenue)
  
• The company's benchmark effective tax rate increased due to unfavorable impacts from Pillar 2 global minimum tax and limitations on finance cost deductibility, potentially affecting net margins. (Impacts net margins)

Valuation

• The analysts have a consensus price target of €167.833 for Wolters Kluwer 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 €190.0, and the most bearish reporting a price target of just €137.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €7.2 billion, earnings will come to €1.3 billion, and it would be trading on a PE ratio of 32.9x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of €147.6, the analyst price target of €167.83 is 12.1% 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.