Transition To Subscription Models Will Create Revenue Stability

Key Takeaways

• Strategic realignments and deeper client engagement are expected to drive revenue growth, strengthen renewals, and enhance net margins.
  
• Innovation and subscription transitions are set to bolster client value, stabilize revenue, and support sustainable earnings growth.
  
• Rising interest expenses, tax rates, and conversion to subscription models could pressure margins and cause revenue fluctuations and financial unpredictability.

Catalysts

Engages in the provision of data analytics and technology solutions to the insurance industry in the United States and internationally.

• Verisk's efforts to enhance its go-to-market approach have led to sales territory realignments, improved client coverage, and new sales force compensation plans, which are expected to drive revenue growth and improve net margins by better matching business needs.
  
• The company is deepening client engagement at a strategic level to gain more insights into enterprise needs, which is anticipated to result in stronger renewals, improved sales outcomes, and increasing revenues.
  
• Investment in innovation, such as new modules across Verisk's digital platform and Advanced Analytics, is poised to bolster client value, enhance the sales process, and contribute to strengthening subscription revenue growth.
  
• Verisk's transition from transactional revenues to subscription arrangements is expected to enhance revenue predictability and lead to a more stable revenue base in the future, contributing to sustainable earnings growth.
  
• The ongoing strategic initiative to expand Verisk's claims ecosystem and increase connectivity in the industry is likely to improve operational efficiency and customer value, potentially enhancing net margins and revenue growth.

Verisk Analytics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Verisk Analytics's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.0% today to 32.9% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $8.46) by about April 2028, up from $951.4 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 40.9x on those 2028 earnings, down from 44.0x today. This future PE is greater than the current PE for the US Professional Services industry at 21.1x.
• Analysts expect the number of shares outstanding to decline by 1.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.7%, as per the Simply Wall St company report.

Verisk Analytics Future Earnings Per Share Growth

Risks

• The increase in net interest expense due to higher interest rates and a potential increase in debt levels might pressure net margins and earnings.
  
• The ongoing conversion of transactional revenues into subscription contracts, coupled with elevated storm-related transactional activity not hitting revenue growth thresholds, could lead to inconsistencies in revenue from quarter to quarter.
  
• The increase in effective tax rates from one-time tax benefits in the previous year could negatively impact net earnings in 2025.
  
• The competitive challenges in retaining client contracts and the potential impact of economic factors and regulatory changes can affect revenue growth and financial predictability.
  
• The company's capital expenditures and investments may not yield immediate financial benefits, potentially affecting free cash flow and future earnings in the short term.

Valuation

• The analysts have a consensus price target of $294.523 for Verisk Analytics 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 $325.0, and the most bearish reporting a price target of just $230.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 40.9x, assuming you use a discount rate of 6.7%.
• Given the current share price of $298.61, the analyst price target of $294.52 is 1.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.