Compliance And Competition Will Weaken Margins Though Efficiency Will Advance

Key Takeaways

• Margin improvement is constrained by rising compliance costs, wage inflation, and challenges differentiating from competitors, despite demand in cybersecurity and digital transformation.
  
• Execution risks from acquisitions and rapid AI adoption may limit benefits from growth initiatives, threatening future revenue streams and sustained earnings recovery.
  
• Accelerating margin pressure, workforce reductions from generative AI, and persistent market weakness threaten Knowit's revenue stability and highlight challenges in maintaining competitive differentiation.

Catalysts

Operates as a consultancy company in Sweden and internationally.

• Although Knowit is positioned to benefit from lasting demand in areas such as cybersecurity and digital transformation, the need for ongoing investment to meet stringent data privacy regulations and rising compliance costs may dilute any margin gains from these opportunities, placing pressure on sector profitability and ultimately limiting improvement in net margins over the coming years.
  
• While long-term growth drivers like increasing digitalization of public sector services and expansion in the defense and fintech segments should bolster Knowit's revenue pipeline, execution risk remains high due to the persistent challenge of differentiating its offerings from both larger international competitors and nimble niche players, which may lead to continued price pressure and stagnating revenue growth.
  
• Although management highlights upward trends in utilization rates and efforts to optimize cost structure, chronic market fragmentation and fierce competition in key Nordic markets have led to insufficient price increases relative to wage inflation; as a result, even gradual utilization improvements may be outweighed by ongoing salary and recruitment expense growth, restricting the potential for meaningful earnings recovery.
  
• Despite investing in high-growth areas such as cloud-based fintech solutions and defense consulting, Knowit's reliance on integrating smaller acquisitions introduces an elevated risk of suboptimal synergy capture and cost inflation, particularly if cultural or operational integration lags, which could suppress long-term operating margins and temper the expected boost to recurring revenues.
  
• While Knowit aspires to move up the value chain in data and analytics and capitalize on AI-driven trends, the rapid pace of AI and automation adoption across client industries could ultimately shrink the need for traditional consulting services faster than Knowit can reskill or reposition, threatening both utilization rates and future revenue streams if the company fails to adapt at sufficient scale.

Knowit Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Knowit compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Knowit's revenue will grow by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.3% today to 4.3% in 3 years time.
• The bearish analysts expect earnings to reach SEK 278.8 million (and earnings per share of SEK 10.86) by about July 2028, up from SEK 81.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, down from 41.3x today. This future PE is lower than the current PE for the GB IT industry at 16.7x.
• Analysts expect the number of shares outstanding to decline 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 7.38%, as per the Simply Wall St company report.

Knowit Future Earnings Per Share Growth

Risks

• Persistent sector-wide price pressure, especially in high-competition areas, is causing Knowit to miss fully offsetting salary inflation with price increases, which puts ongoing downward pressure on EBITA margins and risks further margin erosion.
  
• Prolonged weakness and restructuring in markets like Denmark and Finland, combined with slow improvements in group-wide utilization rates, threaten the company's ability to restore revenue growth and achieve higher revenue stability over the long term.
  
• The rapid adoption of generative AI has already reduced the need for human-centric services in areas such as UX, resulting in a significant decline in headcount and shifting demand away from Knowit's traditional strengths, which could negatively impact both revenues and earnings as legacy service lines risk obsolescence.
  
• Intense competition, margin compression, and difficulties differentiating Knowit's offerings in commoditized consulting segments increase the risk of ongoing net margin pressure and limit the company's ability to command premium pricing.
  
• Delays in client investments, particularly within the management consultancy (Insight) business and the ongoing reduction in consultant headcount, signal a challenging demand environment that could weigh on revenue growth and earnings recovery if broad market conditions do not improve.

Valuation

• The assumed bearish price target for Knowit is SEK143.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Knowit's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK195.0, and the most bearish reporting a price target of just SEK143.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK6.5 billion, earnings will come to SEK278.8 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of SEK122.4, the bearish analyst price target of SEK143.0 is 14.4% 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.