Key Takeaways
- Market expansion and strategic agreements in Nordic countries expected to drive significant revenue growth and positively impact net margins.
- Increased AI demand and strategic vendor partnerships sustain hardware margins, bolstering profit potential amidst industry challenges.
- Reduced gross margin from revenue shift and currency fluctuations could strain net margins, while economic headwinds and vendor changes threaten profitability.
Catalysts
About Atea- Provides IT infrastructure and related solutions for businesses and public sector organizations in the Nordic countries and Baltic regions.
- Atea is expected to experience higher-than-normal revenue growth in 2025, driven by capturing market share and the activation of new frame agreements in countries like Denmark and Finland. This will positively impact their revenue figures.
- Projected growth in hardware and defense sales due to factors like the end of life of a popular operating system and increased public sector spending, particularly in defense, are set to boost revenue and potentially improve net margins.
- The increasing demand for AI solutions and products like CoPilot, coupled with Atea's investment in AI, suggests a future revenue increase and improved net margins from higher-margin services and technologies.
- Denmark is identified as a growth opportunity, with Steinar Sonsteby taking over as country manager to improve operations. Scaling and operational improvements there can enhance EBIT and net margins.
- Atea's strong vendor relationships and strategies in managing vendor bonuses and incentives, particularly on the hardware side, are expected to maintain stable hardware margins and limit the impact on EBIT despite industry-wide challenges.
Atea Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Atea's revenue will grow by 7.1% annually over the next 3 years.
- Analysts assume that profit margins will increase from 2.1% today to 3.3% in 3 years time.
- Analysts expect earnings to reach NOK 1.4 billion (and earnings per share of NOK 11.49) by about May 2028, up from NOK 745.0 million today.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2028 earnings, down from 21.2x today. This future PE is lower than the current PE for the GB IT industry at 20.3x.
- Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 7.98%, as per the Simply Wall St company report.
Atea Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- A shift in revenue mix towards hardware and third-party services has resulted in a lower gross margin, which could impact net margins negatively if the trend continues or if these segments do not maintain higher volume sales.
- Currency fluctuations, particularly the depreciation of the U.S. dollar, have negatively influenced financial outcomes through hedging contracts, impacting earnings and potentially leading to financial unpredictability in subsequent quarters.
- Economic challenges in Finland, despite a return to growth, suggest persistent headwinds in that market, potentially impacting overall revenue growth and profitability if conditions do not improve.
- High cash outflows typical in Q1 raise liquidity concerns, as consistent working capital demands may strain cash flow management if not offset by strong Q4 performance or improved operational efficiency throughout the year.
- Changes in software vendor incentives, such as modifications from Microsoft and Broadcom, have affected margin contributions, indicating risk to earnings if Atea cannot fully offset these effects with increased sales in other areas like CoPilot or managed services.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of NOK146.0 for Atea based on their expectations of its future earnings growth, profit margins and other risk factors.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK43.6 billion, earnings will come to NOK1.4 billion, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 8.0%.
- Given the current share price of NOK142.0, the analyst price target of NOK146.0 is 2.7% 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.
How well do narratives help inform your perspective?
Disclaimer
AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.