Cloud Adoption And AI Assistant Are Expected To Drive Long-Term Upside

Catalysts

About Modelon

Modelon provides cloud based system simulation software that helps industrial customers design, optimize, and commercialize complex engineered systems more efficiently.

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

• The shift from project based services to a recurring, software centric model, with Modelon Impact ARR still growing despite legacy headwinds, is expected to gradually lift revenue quality and earnings resilience as the mix tilts further toward scalable licenses.
• Growing adoption of cloud deployed engineering tools, exemplified by customers like Danfoss rolling out simulations beyond engineering into global sales teams, supports a larger user base per account and can structurally increase license volumes and net margins as seat expansion comes with limited incremental cost.
• Integration of an AI assistant into Modelon Impact lowers the expertise needed to run advanced simulations, which can broaden the addressable engineer pool at existing and new customers and drive higher ARR growth and better operating leverage as usage scales.
• Expansion of the partner and library ecosystem, including new third party libraries and reseller agreements such as TLK Energy, creates additional go to market channels that can accelerate top line growth while leveraging the existing cost base, supporting both revenue and EBIT margin expansion.
• Completed restructuring and a materially lower, sustainable cost base position the company to convert even modest ARR growth into outsized EBIT improvement, creating potential upside to earnings as market conditions stabilize and FX and NASA related headwinds subside.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Modelon's revenue will grow by 32.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -64.4% today to 43.0% in 3 years time.
• Analysts expect earnings to reach SEK 80.2 million (and earnings per share of SEK 7.28) by about December 2028, up from SEK -51.6 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 4.2x on those 2028 earnings, up from -3.5x today. This future PE is lower than the current PE for the SE Software industry at 28.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.21%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Continued macro uncertainty and reduced funding for key North American and federally backed customers, such as the NASA Jet Propulsion Laboratory contract reduction, could keep ARR growth subdued and limit recovery in total revenues and earnings over the coming years.
• The deliberate shift away from legacy and competitor related services, combined with already more than halved services revenue, may structurally reduce top line scale if software license growth from Modelon Impact and the partner ecosystem does not accelerate enough to offset this lost revenue. This could pressure total revenue and EBIT margins.
• Heavy reliance on a relatively small number of large industrial customers in cyclical sectors like aerospace, automotive and energy solutions increases exposure to sector investment slowdowns. This could translate into higher churn or weaker upsell activity, constraining recurring revenues and delaying the path to sustainable profitability.
• The AI assistant and cloud based platform strategy may face slower than expected adoption or stronger competitive responses from larger simulation vendors. This would limit Modelon’s ability to broaden its user base beyond experts and could cap ARR expansion and operating leverage, keeping earnings below expectations.
• While cost reductions have sharply lowered operating expenses, management has indicated that this is now a base from which they will start to build again. If revenue growth remains modest while investments in development, ecosystem expansion and sales resume, adjusted EBIT and cash flow could deteriorate rather than improve.

Valuation

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

• The analysts have a consensus price target of SEK26.0 for Modelon 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 SEK186.8 million, earnings will come to SEK80.2 million, and it would be trading on a PE ratio of 4.2x, assuming you use a discount rate of 5.2%.
  
• Given the current share price of SEK11.0, the analyst price target of SEK26.0 is 57.7% 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.