Grid Modernization And AI Will Support Long Term Subscription Demand

Catalysts

About ikeGPS Group

ikeGPS Group provides software and data solutions that digitize, analyze, and help engineer overhead power and communications infrastructure, with a focus on North American distribution grids.

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

• Massive, long duration investment in North American grid modernization, estimated at more than USD 2 trillion over the coming decade, directly supports sustained demand for IKE Office Pro and IKE PoleForeman, underpinning recurring subscription revenue growth and long term earnings expansion.
• Rising power demand from electric vehicles, AI data centers and electrification is forcing utilities to add capacity and harden distribution networks. This is increasing the need for digital engineering workflows that should drive higher seat counts and average revenue per user, lifting top line growth.
• More frequent climate driven events such as wildfires and severe storms are intensifying regulatory and safety requirements on wooden pole assets. This should accelerate adoption of IKE’s network assessment and compliance tools and support higher margins through a richer software mix.
• Strong ecosystem effects, where large investor-owned utilities increasingly mandate IKE PoleForeman across their contractor and communications partners, are broadening the addressable user base per logo and supporting durable expansion in annual recurring revenue and customer lifetime value.
• Embedding AI-enabled automation such as PolePilot directly into IKE Office Pro, with compulsory per seat pricing uplift, positions the company to convert productivity gains into structural ARPU increases and expanding gross margins as software subscriptions dominate the revenue mix.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming ikeGPS Group's revenue will grow by 25.8% annually over the next 3 years.
• Analysts are not forecasting that ikeGPS Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate ikeGPS Group's profit margin will increase from -52.6% to the average NZ Electronic industry of 7.6% in 3 years.
• If ikeGPS Group's profit margin were to converge on the industry average, you could expect earnings to reach NZ$3.9 million (and earnings per share of NZ$0.02) by about December 2028, up from NZ$-13.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$12.0 million in earnings, and the most bearish expecting NZ$-3.9 million.
• 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 87.4x on those 2028 earnings, up from -14.8x today. This future PE is lower than the current PE for the NZ Electronic industry at 113.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.87%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is delivering very strong structural subscription growth, with platform ARR growing 47% year on year and seats up 55%, while subscription revenue has compounded at around 30% annually and now represents 69% of total revenue at roughly 93% gross margin. If this is sustained, it could drive material earnings expansion and a higher valuation multiple, rather than a flat share price, by increasing revenue and net margins.
• Management is reiterating guidance for at least 35% subscription revenue growth and targeting EBITDA breakeven on a run rate basis in the second half of the year while holding cash operating expenses materially flat and carrying a debt free balance sheet with 34 million dollars of cash. If this is achieved, it may shift market perception from loss making to profitable growth and support share price appreciation through improved earnings and cash flow.
• ikeGPS is still early in penetrating a very large North American grid modernization and broadband buildout market, with an estimated more than 2 trillion dollars of capital over the next decade, only about 6% of logos captured and roughly 20% penetration within those accounts. This implies a long runway for new customer wins and account expansion that could accelerate revenue and long term earnings beyond what a flat share price would imply.
• New AI enabled products such as PolePilot, embedded compulsorily into IKE Office Pro at an additional 200 dollars per seat per year, together with the rapid scaling of IKE PoleForeman to an expected 10 million dollars ARR, create meaningful ARPU uplift and ecosystem effects as large utilities mandate the tools across their contractors. This could structurally lift gross margins and earnings and justify a rising valuation.
• Secular drivers such as surging power demand from electric vehicles and AI data centers, aging wooden pole infrastructure approaching failure thresholds and more frequent climate related events like wildfires are increasing regulatory and engineering workloads. ikeGPS’ high customer satisfaction scores and entrenched position with major utilities mean it is well placed to capture this spend, which could translate into faster than expected revenue growth and margin expansion rather than a stagnant financial profile.

Valuation

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

• The analysts have a consensus price target of NZ$1.11 for ikeGPS 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 NZ$51.5 million, earnings will come to NZ$3.9 million, and it would be trading on a PE ratio of 87.4x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of NZ$1.04, the analyst price target of NZ$1.11 is 6.3% 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.