AI Adoption And Cloud Migration Will Drive Long-Term Upside Potential

Catalysts

About Itera

Itera is a Nordic based digital consultancy that delivers cloud, AI enabled and sector focused technology solutions for customers across financial services, public sector, defense and critical infrastructure.

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

• Accelerating adoption of AI as a core driver of digital transformation, combined with Itera’s proven AI enabled cloud and application services unit that is already growing revenue almost 30 percent in the latest quarter, should support structurally higher top line growth and operating leverage as software driven delivery scales faster than headcount.
• Ongoing migration of enterprises to cloud based, managed and subscription services, reflected in rising recurring revenues and strong growth in cloud consumption, increases revenue visibility and should gradually lift gross margins and earnings stability.
• Heightened focus on cybersecurity and protection of critical infrastructure in Europe, amplified by the war in Ukraine and drone attacks, positions Itera’s defense and security related work as a long duration growth vector that can diversify the customer mix and improve revenue per employee.
• Embedding AI tools and digital agents into internal delivery processes is already improving utilization and reducing reliance on third party consultants, which should translate into sustained revenue per employee growth, higher EBIT margins and improved cash conversion.
• Regional empowerment through the new operating model, combined with early proof points in Sweden and new Norwegian regions, broadens the addressable market and customer base so that even modest rate increases and higher utilization across 14 locations can compound into stronger revenue growth and expanding net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Itera's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 8.4% in 3 years time.
• Analysts expect earnings to reach NOK 89.4 million (and earnings per share of NOK 1.09) by about December 2028, up from NOK 25.6 million today.
• 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 10.6x on those 2028 earnings, down from 25.9x today. This future PE is lower than the current PE for the NO IT industry at 22.2x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• AI driven productivity gains could be competed away through flat or lower billing rates if customers push for price reductions rather than reinvesting savings. This would cap revenue per employee growth and limit any expansion in net margins and earnings.
• The consultancy market is currently described as neither clearly improving nor deteriorating. If the broader IT services cycle remains weak for longer than expected, Itera’s return to growth could stall again and put renewed pressure on revenue and EBIT margins.
• Itera’s strategy depends on empowering 14 regional locations and scaling newer markets such as Sweden and Rogaland. If these investments do not reach sustainable utilization or pricing power, overhead and transition costs could outweigh benefits and restrain earnings growth.
• Heavy exposure to Ukraine as both a delivery hub and a source of differentiation in defense and critical infrastructure creates geopolitical and operational risk. Any escalation or disruption could impair project delivery, slow new contract wins and depress revenue and cash flow.
• Revenue concentration remains high with around half of sales coming from the top 10 customers and financial services still the largest sector. A strategic shift or spending slowdown by a few key clients could offset gains in AI, cloud and defense and weigh on both revenue and operating margins.

Valuation

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

• The analysts have a consensus price target of NOK9.0 for Itera 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 NOK1.1 billion, earnings will come to NOK89.4 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of NOK8.1, the analyst price target of NOK9.0 is 10.0% 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.