Strong AI And Cloud Demand Will Drive Service Expansion Through AWS And Microsoft Partnerships

Key Takeaways

• Strong growth in Software & Cloud segment driven by AI, security, and cloud services will positively impact future revenue.
  
• International expansion and strategic partnerships aim to increase market share and enhance profitability through diverse service offerings.
  
• Dependency on Microsoft's incentive programs and market uncertainties, coupled with revenue shifts and cautious demand, could impact revenue growth and margins across regions.

Catalysts

Operates as an IT consultancy company.

• Crayon expects strong growth in its Software & Cloud segment, driven by increased demand for AI, security, and cloud services, supported by rising incentives from Microsoft. This is likely to impact revenue positively in the future.
  
• The company is focused on international expansion in Europe and APAC, potentially increasing its revenue by gaining market share, particularly in public and private sectors across large European economies.
  
• Crayon's improvements in working capital and EBITDA margins, illustrated by a strong record of cost control and efficiency measures, are expected to enhance net margins and overall earnings.
  
• The company plans to ramp up resources in its Consulting business, anticipating increased gross profit and contributing to higher revenue as the market shows signs of recovery and demand increases.
  
• Strategic partnerships, such as the Generative AI Partner Innovation Alliance with AWS, position Crayon to deliver AI solutions, expanding service offerings and improving revenue and profitability.

Crayon Group Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Crayon Group Holding's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 16.0% in 3 years time.
• Analysts expect earnings to reach NOK 1.5 billion (and earnings per share of NOK 16.02) by about January 2028, up from NOK 138.0 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 10.9x on those 2028 earnings, down from 79.4x today. This future PE is lower than the current PE for the NO Software industry at 41.3x.
• Analysts expect the number of shares outstanding to grow by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Crayon Group Holding Future Earnings Per Share Growth

Risks

• Demand for consulting services in the Nordics is cautious, leading to conservative hiring practices, which may impact potential revenue growth and net margins in this region.
  
• The consolidation of Broadcom's distribution model has resulted in a loss of partners and revenue shift from Europe to APAC, negatively impacting Channel business performance and overall revenue.
  
• The transition to cloud services (CSP) from traditional enterprise agreements (EA) may require increased incentives and price sensitivity adjustments, which could pressure net margins in the short term.
  
• Slow decision-making cycles in the U.S., particularly influenced by election-related market uncertainties, are impacting software and cloud adoption rates, potentially affecting revenue growth in that region.
  
• The dependency on Microsoft's evolving incentive programs, despite assurances of positive impacts, introduces a risk of revenue volatility if market conditions or Microsoft's strategic focus change unexpectedly.

Valuation

• The analysts have a consensus price target of NOK141.8 for Crayon Group Holding 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 NOK190.0, and the most bearish reporting a price target of just NOK90.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK9.1 billion, earnings will come to NOK1.5 billion, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 7.4%.
• Given the current share price of NOK124.1, the analyst's price target of NOK141.8 is 12.5% 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.