Expanding Big Tech Partnerships Will Boost Generative AI Advancements

Key Takeaways

• Expanding partnerships with Big Tech firms and advancements in generative AI solutions are projected to significantly drive Innodata's revenue growth.
  
• New platform developments and strategic co-location of staff on customer sites are expected to boost customer trust and service differentiation.
  
• Innodata faces revenue concentration risks, execution and scaling challenges, and potential strain on margins due to reliance on a major Big Tech customer and competitive pressures.

Catalysts

Operates as a global data engineering company in the United States, the United Kingdom, the Netherlands, Canada, and internationally.

• Innodata's focus on providing Big Tech companies with data engineering solutions for the development of generative AI frontier models is expected to drive substantial revenue growth, as more Big Tech companies increase their generative AI investments. This has been evidenced by strong organic revenue growth and new customer engagements.
  
• The company is significantly expanding relationships with seven other Big Tech customers, all of whom are investing aggressively in generative AI. This deepened involvement is likely to boost revenues as these relationships become a larger part of Innodata's revenue makeup in the coming year.
  
• Innodata is developing a new platform for LLM safety and evaluation, which has been well received in demonstrations to Big Tech customers, opening potential new paths for revenue and enhancing its service offering.
  
• The company's strategy to co-locate staff on customer sites is anticipated to strengthen customer relationships, enhancing trust and collaboration that could lead to expanded engagements and increased revenues.
  
• Innodata has shown strong adjusted EBITDA growth, and the ongoing momentum in expanding customer engagements and strategic hires indicate potential improvements in earnings as operational efficiency and scale are achieved.
  

Innodata Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Innodata's revenue will grow by 30.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.6% today to 13.3% in 3 years time.
• Analysts expect earnings to reach $40.5 million (and earnings per share of $1.12) by about December 2027, up from $20.0 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 49.5x on those 2027 earnings, down from 54.4x today. This future PE is greater than the current PE for the US Professional Services industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 7.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.26%, as per the Simply Wall St company report.

Innodata Future Earnings Per Share Growth

Risks

• Innodata's reliance on a single Big Tech customer for a substantial portion of its revenue poses a concentration risk, which could impact future revenue stability if the customer diversifies or reduces spending.
  
• The company's expansion strategy involves significant recruitment costs that might strain margins if not managed efficiently as it scales to support larger projects with Big Tech clients, potentially impacting net margins.
  
• Despite reported growth and confidence in gaining new contracts, execution risks remain in expanding and scaling operations to accommodate additional Big Tech and enterprise engagements, challenging consistent revenue growth.
  
• Innodata's federal government engagements, while promising, are not expected to significantly contribute to revenue in the short term, indicating potential delay in revenue diversification and growth from this sector.
  
• The potential need to compete with other firms for a share of the Big Tech market could impact Innodata’s revenue growth and require sustained investment in relationship building and service differentiation to maintain its competitive edge.

Valuation

• The analysts have a consensus price target of $46.33 for Innodata 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 $54.0, and the most bearish reporting a price target of just $40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $303.1 million, earnings will come to $40.5 million, and it would be trading on a PE ratio of 49.5x, assuming you use a discount rate of 6.3%.
• Given the current share price of $37.57, the analyst's price target of $46.33 is 18.9% 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.