Digital Automation Will Undermine Traditional Consulting Though Pipeline Offers Promise

Key Takeaways

• Automation, digital platforms, and global competitors threaten the company's traditional consulting model, driving lower utilization rates, pricing pressure, and margin compression.
  
• Lack of proprietary technology and growing compliance costs increase vulnerability to revenue volatility, client loss, and diminished long-term profitability.
  
• Expansion into higher-value services, operational efficiency gains from technology, and international momentum position the company for sustained growth and improved margins.

Catalysts

Engages in the provision of consulting services to business customers under the Resources Global Professionals (RGP) name in North America, the Asia Pacific, and Europe.

• The rapid advancement of digital transformation and AI automation is likely to reduce the need for traditional consulting and project-based staffing, pushing clients to automate workflows internally and depreciate the utilization rates and fee structures that have historically supported Resources Connection's revenues and margins. As a result, both top-line growth and profitability face structural, long-term headwinds as clients transition away from external consultants toward more automated solutions.
  
• Demographic changes in the workforce are likely to accelerate adoption of alternative staffing platforms and direct sourcing, as younger, tech-native decision-makers favor digital-first gig economy models over traditional professional services. This shift is expected to increase competition from lower-cost digital platforms and squeeze Resources Connection's pricing power and gross margins, while also eroding its relevance with next-generation clients.
  
• The competitive landscape is intensifying due to the globalization of remote, digital skills, enabling more international and offshore competitors to undercut Resources Connection's fees. Over time, heightened price competition from these emerging market entrants is anticipated to drive margin compression and revenue declines, especially as clients focus on cost optimization in an uncertain macroeconomic environment.
  
• Persistent client concentration risk and inability to create differentiated proprietary technology leave the company exposed to volatile revenue swings when large accounts reduce spend or transition to larger, better-resourced consulting firms, as seen in the double-digit year-over-year contraction in On-Demand revenues and the significant goodwill impairment charges that highlight the fragility of its core business.
  
• Increasing regulatory complexity and compliance costs are expected to disproportionately burden mid-sized firms like Resources Connection, particularly as industry consolidation accelerates in favor of larger players with broader offerings and superior technology infrastructure. This trend is likely to result in ongoing SG&A pressures and declining net margins, reducing long-term earnings power even if revenue temporarily stabilizes.

Resources Connection Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Resources Connection compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Resources Connection's revenue will grow by 2.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -19.3% today to 7.7% in 3 years time.
• The bearish analysts expect earnings to reach $46.5 million (and earnings per share of $1.3) by about July 2028, up from $-108.0 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 4.0x on those 2028 earnings, up from -1.7x today. This future PE is lower than the current PE for the US Professional Services industry at 24.3x.
• Analysts expect the number of shares outstanding to decline by 1.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.61%, as per the Simply Wall St company report.

Resources Connection Future Earnings Per Share Growth

Risks

• Despite current headwinds, Resources Connection is seeing significant growth in the size and quality of its consulting project pipeline, with more frequent $1 million-plus and $5 million-plus opportunities, which, if converted, could meaningfully boost future revenues and earnings.
  
• The company's ongoing investments in technology, AI, and automation have already reduced run-rate SG&A expenses by 8% and are expected to deliver further operational efficiency and eventual margin improvement, supporting higher net margins long-term.
  
• Expansion into higher-value service offerings-such as digital technology, data strategy, operational performance, risk and compliance, and cloud migration-positions the company to benefit from secular trends of digital transformation and regulatory complexity, which would support sustained revenue growth.
  
• Strong international momentum, particularly in Europe, Japan, and the Philippines, alongside growing offshore delivery capabilities in India, diversifies revenue streams and captures growth in markets where demand is rebounding, which should stabilize and potentially grow revenues and earnings.
  
• A pristine balance sheet with $73 million of cash and zero debt not only enables continued strategic investments and share repurchases but also supports sustainability of dividend payouts, promoting shareholder returns and potentially enhancing share price.

Valuation

• The assumed bearish price target for Resources Connection is $5.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Resources Connection'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 $15.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $605.5 million, earnings will come to $46.5 million, and it would be trading on a PE ratio of 4.0x, assuming you use a discount rate of 6.6%.
• Given the current share price of $5.61, the bearish analyst price target of $5.0 is 12.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.