Integrated Worklife Platform And AI Will Transform Service Delivery

Key Takeaways

• Alight's focus on AI and automation in its platforms aims to drive innovation, improve efficiencies, and enhance revenue growth and margin expansion.
  
• Transformative initiatives and client confidence through renewals position Alight for stable, predictable revenue and improved net margins.
  
• Prolonged market volatility and macroeconomic shifts could delay client decisions and affect Alight's revenue, cash flows, and project pipeline.

Catalysts

A technology-enabled services company worldwide.

• Alight's focus on leveraging its integrated Alight Worklife platform and deep data capabilities, particularly through the use of AI and automation, is expected to drive innovation and deliver additional value for clients, while enhancing operational efficiencies. This will likely positively impact revenue growth and margin expansion.
  
• The launch of the self-service leaves administration reporting platform and ongoing enhancements in health and wealth platforms are intended to capture only 10% of the current market penetration, suggesting significant revenue growth potential from expanding services to existing clients.
  
• Strategic initiatives to transform the delivery operating model by standardizing implementation routines and enhancing service experiences are aimed at reducing costs and improving client satisfaction, which should lead to better net margins.
  
• The company's strong renewal trends, with major clients like Starbucks and Baxter renewing their contracts, reflect client confidence and provide a solid basis for predictable recurring revenue, which supports stable earnings.
  
• Financial strategies, including the restructuring program and decreased interest expenses from repricing a term loan, are designed to streamline processes and drive cash flow improvements, thereby enhancing free cash flow and potentially boosting earnings per share.

Alight Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alight's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.9% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $111.0 million (and earnings per share of $0.17) by about May 2028, up from $-138.0 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 53.6x on those 2028 earnings, up from -20.2x today. This future PE is greater than the current PE for the US Professional Services industry at 21.2x.
• Analysts expect the number of shares outstanding to decline by 3.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Alight Future Earnings Per Share Growth

Risks

• Increased market volatility may elongate the client decision-making process for both project and ARR deals, which could delay revenue recognition and impact cash flows.
  
• Fees from assets managed through financial advisers, though a small portion of their wealth business, could be pressured by a protracted market downturn, thereby affecting earnings.
  
• A cautious outlook on volumes or participant counts, considering the lagging impact from changes in employment levels, could potentially influence revenue streams.
  
• Nonrecurring project revenues were down by 26%, which reflects continued caution and unpredictability in discretionary spending, potentially impacting overall revenue growth.
  
• Potential shifts in the macroeconomic environment, such as trade wars or regulatory changes, might lead to clients re-evaluating or delaying benefits program changes, affecting Alight's revenue and project pipeline.

Valuation

• The analysts have a consensus price target of $9.857 for Alight 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 $11.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.6 billion, earnings will come to $111.0 million, and it would be trading on a PE ratio of 53.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $5.23, the analyst price target of $9.86 is 46.9% 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.