Expanding Into Generative AI With Big Tech Will Create Future Opportunities

Key Takeaways

• Expanding partnerships with big tech and focus on generative AI are key revenue growth drivers.
  
• Strategic reinvestment in capabilities and automated platforms enhances efficiencies and long-term revenue prospects.
  
• Heavy reliance on a few large tech clients and shifts in AI investments pose risks to revenue diversification and future growth, while expansion efforts challenge near-term profitability.

Catalysts

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

• Innodata is expecting strong revenue growth in 2025, forecasting 40% or more growth, driven by new business wins and expansion with existing customers. This is anticipated to boost total revenue.
  
• The company is focusing heavily on the generative AI market, particularly with big tech companies that are aggressively increasing their investments in AI, which is expected to drive revenue significantly.
  
• Expanding relations with big tech customers, exemplified by a 159% revenue increase from seven other big tech clients, supports further diversification and potential revenue growth.
  
• Innodata is strategically reinvesting its cash flow to expand capabilities and enhance operational efficiencies, which should improve both adjusted EBITDA and net margins.
  
• The commitment to develop automated trust and safety platforms positions Innodata well within the enterprise AI market, creating long-term opportunities for revenue growth and improved earnings.

Innodata Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Innodata's revenue will grow by 29.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.8% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $41.9 million (and earnings per share of $1.08) by about March 2028, up from $28.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 81.3x on those 2028 earnings, up from 48.4x today. This future PE is greater than the current PE for the US Professional Services industry at 20.9x.
• 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 6.57%, as per the Simply Wall St company report.

Innodata Future Earnings Per Share Growth

Risks

• The company's reliance on a limited number of large tech customers, particularly one significant client accounting for a large portion of revenue, poses a risk to revenue diversification and stability.
  
• Expansion and piloting with new clients are in early stages and could face challenges in turning these into substantial revenue, impacting revenue growth expectations.
  
• Planned investments in expansion, especially in hiring and development of new technologies, may not yield immediate returns, potentially impacting net margins and near-term profitability.
  
• The tax rate is expected to rise significantly from a negative rate to an estimated range of 28% to 31.5%, which could impact net income adversely.
  
• The company's growth strategy depends significantly on ongoing and increasing large AI-related investments by big tech companies. Any reduction in these investments or shift in their strategic focus could directly affect future revenue growth and earnings.

Valuation

• The analysts have a consensus price target of $74.0 for Innodata based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $369.3 million, earnings will come to $41.9 million, and it would be trading on a PE ratio of 81.3x, assuming you use a discount rate of 6.6%.
• Given the current share price of $44.35, the analyst price target of $74.0 is 40.1% 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.